27.07.2005 *** Geopolitics - Geoeconomics
By F. William Engdahl, August 2002
It was fortunate for the historical legacy of President Franklin Delano Roosevelt, that the initial military success of the Third Reich in Europe in 1939-1940, and the bombing of Pearl Harbor in December 1941 took attention away from his record in dealing with America’s Great Depression. Had Roosevelt not ended his Presidency as a victorious war President, he would instead be remembered as the President whose policies all but ruined the inherent economic vitality of the American economy for decades after.
A retrospective examination of the economic policies of Roosevelt's New Deal from March 1933 to onset of World War II in late 1941, reveals extraordinary failure and incompetence viewed from the perspective of whether they succeeded in restoring healthy real growth and robust employment to the economy. So blatant was the failure of these policies, over such a period of years, the question must be asked whether in fact a policy other than fostering normal recovery was priority.
The economic developments in the American economy in the period from early 1933 until outbreak of war in December 1941, were profoundly important for the developments of the following decades. The analysis of that economic period is more complex because of the prevailing mythology, and de facto romanticism by many economic historians of what was accomplished by the Roosevelt New Deal. Most prominent historians of the New Deal were themselves adherents of the New Deal ideology such as Arthur M. Schlesinger Jr. or Erik Goldman, John K. Galbraith and others. The postwar era led to apparently short memories among many, and the thorough discrediting of the Herbert Hoover Presidency by the New Deal Democrats had placed advocates of a more balanced understanding of the economics of the New Deal on the defensive, until at least the late 1980's.
The other complication of the ascendant victory of the Roosevelt New Deal, as inchoate and pragmatic as it evolved, is the birth it gave to its polar opposite in the postwar period, the von Hayek extreme libertarianism current in economics, which regarded the State and all related government bureaucracy as inherently evil and inefficient, as a "road to serfdom." The danger thus, to reach a balanced critique of the Roosevelt economic period from 1933-1941, is that it might be misinterpreted to be another von Hayek-type attack on New Deal public policy.
The Government has always, necessarily so, played a vital role in fostering or supporting American economic growth. That being said, we proceed to look at the economic developments of the early New Deal.
Why was the US depression so deep and long?
The signal question which must be answered in assessing events of the New Deal period is, why the US economic depression lasted far longer than that of any other major industrial country, and why it also was so much deeper a depression than in any other industrial land. There had been a qualitative expansion of general standards of living, wage levels, industrial productivity gain and technological advance in the American economy in the period 1919-1930. How could it be that such a solid technological base could not provide the foundation for a rapid and strong recovery after 1933?
The relevant question is why eight years of peacetime Roosevelt Presidential leadership, with the President holding almost monarchical powers much of that time, in the face of an overwhelmed and disorganized Congressional leadership, why FDR and his New Deal policies failed to bring the Nation out of depression?
Official US Commerce Department data underscore the point. In 1930 the estimated unemployment rate was 8.9%. This was before the 1931 Austria Creditanstalt collapse triggered the German crisis, and led to the Pound Sterling’s abandoning of the gold standard, all of which sent heavy new financial and banking shocks to New York institutions and led to a severe second wave of crisis, just as the US was beginning to come out of the stock market crisis of 1929.
By 1931 unemployment was at 16.3% of the workforce, peaking at 25.2% on FDR's inauguration in 1933. Yet by 1938, unemployment was still a staggering 19.1% of the workforce, and in 1939 it remained stubbornly at 17.2%.
The League of Nations' World Economic Survey of 1938/1939 made comparisons between major industrial economies. In 1932 the United States ranked average, in terms of unemployment of the major countries.
By mid-1938 after five years of the New Deal only three nations—Netherlands, Norway and Denmark—had worse unemployment than the US. The level of industrial production of the USA in 1938 had reached only 65% the level of 1929. That year, 1938, was the year a second deep depression wave hit, following the end of the huge fiscal spending recovery aiding Roosevelt's 1936 re-election, dubbed by economists of the time the Roosevelt Depression.
In the UK, industrial production in 1937 had passed 124% of the 1929 level. That is, the economy underwent real growth, and without major Keynesian deficit spending. Britain in 1931 abandoned the gold standard and tied Sterling to the Commonwealth trade zone, so-called Sterling Preference Area. Germany reached a level of 117%, Sweden 149%, Japan 170% of 1929 levels. Of some 22 nations listed by the League study, fully 19 showed a higher rate of recovery in industrial production than the United States. That is a damning indictment.
France, the only other country which followed policies similar to the New Deal, was the only other country with equally low industrial growth in the period. The League report noted, "Both the Roosevelt administration and the Blum government in France adopted far-reaching social and economic policies, which combined recovery measures with measures of social reform." The League of Nations' 1938 survey added, "The consequent doubt regarding the prospects of profit and the uneasy relations between business-men and the Government have in the opinion of many, been an important factor in delaying recovery," noting that, unlike the UK and Germany, both France and USA by 1938 had, "failed to regain the 1929 level of employment and production."
Why eight years of Roosevelt economic policy produced such disastrous economic recovery results, is the crucial question. The answer appears to be that the group of men who advised the President on economic and social policy during the peace years of the Depression, were focussed on a broad social agenda, one of using the depression crisis to shift the United States from a market economy, which they contemptuously termed "laissez-faire capitalism," towards a State-dominated economy of central planning.
Their primary goal was not restoring business investment and growth based on the basic dynamism of the private sector in the American market economy. In this respect, the New Deal marked, in its broad features and economic impact, a fundamental policy reverse from the post-Civil War nature of private sector-government relations.
FDR, for his part, was one of the shrewdest power-base builders, who seemed to have his gaze fixed on building a mass political constituency, through the buildup of the State sector, and its increase of jobs, a constituency which would continue to re-elect his Democrats and build a permanent Democratic Party-loyal political machine. Indeed, Democrats held the White House from 1932 until 1952, fully two decades, and FDR himself managed to get elected four times, a record which was later forbidden by Constitutional Amendment in 1951.
The Brain Trust agenda
By most accounts, Roosevelt was ignorant of economics and basic business, and had little interest in addressing that defect. His Presidential campaign against Hoover was fuelled by the advantage that, in the deepening economic depression, attack of the status quo was almost all that was needed to win.
Once President, however, FDR moved swiftly with a specific set of legislative actions in his legendary First Hundred Days and beyond. The agenda was drafted for him by a small circle of intellectuals, whom he had known in some cases since World War I. The most influential of them were Supreme Court Justice Louis Brandeis and his Harvard Law School protege, Felix Frankfurter, Louis Howe, Stuart Chase, and Columbia Professor Rexford Guy Tugwell. Only slightly in the background, playing a pivotal role of influence was London School of Economics Labour Party Marxist, Harold Laski, who had been a close friend of Frankfurter's since Frankfurter won for Laski a lectureship at Harvard, where the latter taught from 1916-1920.
If one looks at the speeches and radio addresses of FDR in the early years, they are filled with scathing attacks on "the money monopoly," and against big business generally. In the midst of depression, this went over well, of course. In his March 4 1933 first Inaugural Speech to the Nation, in the midst of the nationwide banking panic which had begun only 17 days before, Roosevelt declared, "Practices of the unscrupulous money changers stand indicted in the court of public opinion...Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers...The money changers have fled from their high seats in the temple of our civilization."
A careful reading of Roosevelt's First Inaugural is revealing for how openly it lays out the social planning agenda of the small circle of his Brain Trust advisers at the onset of his New Deal. Roosevelt continued his Biblical analogy, which of course, implicitly places FDR in the role of Jesus who chased the money changers: "We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. Happiness lies not in the mere possession of money; it lies in the joys of achievement...The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits."
The President was speaking to a nation in the midst of the worst bank panic in history, where even the Federal Reserve had closed, and he told the population to forget about money or profit or possession of money. Then FDR went into the outlines of his solution: public employment, combined with mass population resettlement back to the land: "Our greatest primary task is to put people to work...It can be accomplished in part by direct recruiting by the government itself, treating the task as we would treat the emergency of a war, but at the same time through this employment, accomplishing greatly needed projects to stimulate and reorganize use of our natural resources...We must frankly recognize the overbalance of population in our industrial centers, and by engaging on a national scale in a redistribution, endeavor to provide a better use of the land for those best fitted for the land."
Here FDR spoke about a major population resettlement from urban industrial centers to the land, anticipating his Civilian Conservation Corps. As well, he indicated the major public works jobs programs he was about to propose. The concept behind the program was national economic planning, a concept dear to several of his more radical Brain Trust members. Roosevelt stated in the speech, that such government relief efforts, "can be helped by national planning for and supervision of all forms of transportation and of communications and other public utilities...We must act and act quickly."
Most explicitly, Roosevelt declared he was willing to suspend the Constitutional Separation of Powers between Congress, Executive and Judiciary if need be: "It is to be hoped that the normal balance of executive and legislative authority may be wholly adequate to meet the unprecedented task before us. But it may be that an unprecedented demand and need for undelayed action may call for temporary departure from that normal balance of public procedure. I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require."
To leave no doubt what he was pointing to if deemed necessary, Roosevelt concluded his speech by threatening to press for dictatorial powers should Congress balk at his agenda: "In the event Congress shall fail to take one of these two courses, and in the event that the national emergency is still critical, I shall not evade the clear course of duty that will then confront me. I shall ask Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe."
These remarks could be ignored as rhetorical effort by a new President confronting an unprecedented crisis, attempting to calm through bold sounding statements, while keeping his options open. The subsequent development of Roosevelt New Deal economic measures, however, indicated that the speech was no aberration. Rather it was a statement of philosophy of the Brain Trust core group around the new President.
Roosevelt's was a most extraordinary and demagogic speech, for a man elected on a promise to restore confidence and get the nation on the road to recovery and prosperity. Rather than call for combined cooperative effort of the entire Nation, to work together to restore confidence in banks and investing in the economy, Roosevelt went for what can only be termed a sort of class war attack against the "money changers in the temple." This hardly restored confidence in the soundness of banks.
The core group of FDR's early advisers centered around the figure of Harvard Law School Professor, Felix Frankfurter, an FDR intimate since World War I days. The inner circle included at the outset also Columbia University Prof. Rexford Guy Tugwell, author Stuart Chase, Agriculture Secretary Henry A. Wallace, and a small number of others, including Harold Laski at the London School of Economics. These were the men who had the private ear of the President on economic issues in 1933-1937.
'A new deal'
In his Presidential acceptance speech in 1932, Roosevelt promised "a new deal for the American people." The term was taken from a 1932 book by the same name, "A New Deal," written by Stuart Chase. That book rapidly disappeared from the shelves after Roosevelt's election. Its contents were the currency of White House economic policy discussion by Tugwell and other central planners around the new President.
Chase, along with Tugwell and Robert Williams Dunn, had jointly written a report, "Soviet Russia in the Second Decade," following their 1927 travel to Stalin's Russia.
In his 1932 book, "A New Deal," Chase argued that the earlier transition out of feudalism into what he called laissez-faire capitalism, was essentially over. The era of Trusts, monopolies, capital concentration by large banks, must now give way to central or collective planning. Chase wrote, "modern industrialism, because of its delicate specialization and interdependence, increasingly demands the collectivism of social control to keep its several parts from jamming. We find a government meeting that demand by continually widening the collective sector through direct ownership, operation and regulation of economic functions." He adds, "Competition is perhaps a good thing—in its proper place. Where is its proper place? Collectivism is beyond peradventure on the march."
Much of Chase's book was filled with fulsome praise for Stalin’s Russian model of central planning and its achievements, reflecting the fascination of numerous younger American intellectuals in the early 1930's.
In his "A New Deal," intended as a kind of blueprint for the Roosevelt campaign, Chase advocated what he called, "The Third Road, a road which runs neither to red dictatorship nor to black (business)." Chase proclaimed that under the Third Road, "private profit will not furnish the happy hunting ground it used to. State trusts, investment control, the curbing of speculation, will choke the muzzle of the more devastating forms." He also proposed drastic economic controls, an eerie harbinger of what would come to pass under the Federal Reserve of Alan Greenspan: "The Federal Reserve will take over the control of currency, the stock exchanges, banks and domestic investment... A new Foreign Trade Corporation will supervise exports, imports and foreign loans. Public works will undoubtedly be centralized in one department..."
Leaving no doubt that his sentiments were not market-oriented in any way, Chase concluded his tract by stating, "We can go on, however...without violent revolution...if we are willing to halt expansion, and organize industry on the basis of using to the full the equipment we now possess. This is the program of the third road. It is not an attempt to bolster up capitalism, it is frankly aimed at the destruction of capitalism, specifically in its most evil sense of ruthless expansion. The redistribution of national income, the sequestration of excess profits, and the control of new investment are all designed to that end." Little wonder that Chase was given a very discreet background policy role in FDR's inner circle. This was explosive stuff for the American public, even in an economic depression.
After leaving Harvard in 1910, Chase had joined the Boston Fabian Club and went to Chicago to work in Jane Addams' Hull House. As a young bureaucrat with the Federal Trade Commission in 1917, Chase investigated charges against Armour & Co. meatpackers. This all shaped his social outlook, and the Soviet model gave it justification in terms of national planning. Chase first met Roosevelt in 1932, but his role was more as a writer than as a policy administrator in the New Deal. He held several official consulting posts in the New Deal, but was mainly influential through his good friend, Rexford Tugwell, and through his writings.
Rexford Guy Tugwell, the Columbia University economics professor who traveled with Chase in 1927 to the Soviet Union, was the central person of this collectivist group around FDR. Indeed, when it emerged that Tugwell was one of the inner circle of the new President, business leaders and newspapers began to research Tugwell's economic writings, and came away shocked, leading some to nickname him, "Rexford the Red."
As newspaper journalists began digging into Tugwell's published writings for clues as to what policies the new President Roosevelt was being given by his top advisers, they became alarmed.
In a paper in the American Economic Review March 1932, Tugwell wrote, that the quest for profit no longer motivated business, but that instead it produced "insecurity" because profits were, "used for creating over-capacity in every profitable line; they are injected into money market operations in such ways as to contribute to inflation; they are used, most absurdly of all, as investments in the securities of other industries." Tugwell proceeded further in his frontal assault on the core of the market private enterprise system which had created such extraordinary wealth and improvement of general living standards over the previous decade: "Industry is thought of as rather a field for adventure...The truth is profits persuade us to speculate." When such comments were widely reported in the Nation's media, they did little to bolster businessmen's confidence in the new Administration.
In discussing a proposal to introduce national economic planning, Tugwell wrote in 1932, "it seems altogether likely that we shall set up, and soon, such a consultative body...The day on which it comes into existence will be a dangerous one for business...There may be a long and lingering death (of the private profit enterprise—w.e.), but it must be regarded as inevitable." Private business, Tugwell added, "would logically be required to disappear. This is not an overstatement for the sake of emphasis; it is literally meant."
In October 1932, that is, one month before FDR's election, Rexford Guy Tugwell went on to formulate a six-point program for dealing with the depression crisis. Tugwell opposed wage cuts, then a common method of corporate cost cutting. He insisted, however, on reducing retail prices, and called for "drastic income and inheritance taxes," as well as "avoidance of budgetary deficits and monetary inflation." Obviously businesses could not possibly simultaneously maintain wage levels, reduce prices, and pay increased taxes, without risking bankruptcy in such crisis times. To this, Tugwell advocated, "the taking over by the government of any necessary enterprises which refuse to function when their profits are absorbed by taxation."
In brief, Tugwell's program, and this was planed, would first make it impossible for business to function, then bring those failed businesses under nationalization or state ownership. Tugwell concluded his 1932 program, "So long as prices, profits and individual production programs are at the disposal of independent business executives, our system will continue to show much the same faults as it displays at present." Tugwell endorsed Norman Thomas' League for Industrial Democracy program which called for a, "new social order based on production for use, not for profit."
Tugwell was strategically placed in 1933 as Deputy Secretary of Agriculture, just under his recommended choice of Secretary of Agriculture, Iowa farm editor, Henry A. Wallace. Tugwell continued in the early months to have regular access to his old friend, FDR as well.
The AAA and collective farming efforts
Little wonder that businessmen who read such quotes from a member of FDR's inner circle, became alarmed. All the more so, when a spineless Congress in the first Hundred Days rubber-stamped major new legislation, including the creation of the National Industrial Recovery Act (NIRA), and the Agriculture Adjustment Act (AAA), both laws victories for the Tugwell-Stuart Chase-A.A. Berle central planning faction within FDR's inner circle.
The AAA and NIRA, both of which were struck down later by the Supreme Court as unconstitutional, were the high-point of the direct influence of the national planners around Tugwell, Stuart Chase and A.A. Berle.
The Agriculture Adjustment Act was passed in the First Hundred Days by Congress in May 1933. It was the work of Tugwell and Henry Wallace, with the legislative draft language corrected by Felix Frankfurter, who played a central role in leglslative language of all major New Deal bills.
American farming had been in trouble since the end of World War I, and had never readjusted during the 1920's to the recovery of European agriculture and their imposition of protective tariffs. Farm debt per capita was alarmingly high coming into the depression. The AAA took a bad situation and made it worse in terms of distorting long-term market change, and creating a massive, absurd state intervention structure for the first time outside of war, into the nation's production of food and textiles. Indeed, the present distortions of USDA agriculture subsidies and the attendant bureaucratic leviathan of field agents, payments for set-aside and such trace back to the precedent set under the AAA.
At the time when millions of Americans were hungry and ill-clothed during the depth of the depression, the AAA ordered farmers to destroy crops and to kill livestock. The goal of the Tugwell AAA was simply, to "raise farm prices." The problem that was ignored, is that someone must pay the rising food and crop costs. And in a depression, who should that be? The millions of unemployed?
In order to raise prices fast, Wallace ordered 10 million acres of cotton crop to be plowed under and destroyed in August 1933, followed by the killing of 6 million pigs, including the reproductive potential of sows and small pigs, to meet the demand of farmers for 1914 levels of "purchasing power parity." Ironically, under AAA, the pigs were turned into fertilizer which went to raise output on remaining farms even more.
The farm surplus crisis was further aggravated by FDR's high-handed decision to torpedo a summer 1933 international monetary conference in London, opting instead for a national course, leaving European governments little choice but to counter USA import tariffs with their own, further limiting US exports of agriculture products, adding to the relative glut.
Farmers who agreed not to plant specific crops were given direct payment not to grow. The payments for not growing were financed from a tax on food processors—slaughter houses, grain mills and such. In turn consumers were forced to cover the tax cost through higher prices. The Secretary of Agriculture further was given exclusive powers to license food processors in order to control supply and raise prices.
The AAA was declared unconstitutional in January 1936 by the Supreme Court. That came after two years of the worst drought in history, especially in 1934, reduced crops far more than any AAA. In the period 1934-1936, from the Appalachians to the Rocky Mountains drought destroyed between 20% and 33% of major crops. Not surprisingly, such drought cut supply and led to rising prices, something the AAA opportunistically took the credit for.
The impact of the AAA was particularly savage in the Southern tenant or sharecropping farming, where AAA subsidies were paid to the owner, not the tenant farmers, resulting in major devastation of income and jobs of tenants and mass unemployment in face of nationwide depression. As a result, some 32 million Americans struggled to eke out subsistence many on marginal farms when perhaps 26 million would have been realistic. Millions of families were kept in semi-feudal status through the hopes engendered through AAA and its successor.
The very concept of the AAA was counter to the long-term economic process of creating lower price food to a growing urban labor force. After its provisions for taxing processors were ruled unconstitutional in 1936, a month later FDR's team had drafted and passed in Congress, amid great populist pro-farm fanfare, the reworked Soil Conservation and Domestic Allotment Act of 1936, maintaining the same essential intervention policy with other words. By 1938 the Federal government held more direct control over the nation's farming than ever before. And direct control, rather than mere restriction was the defining aspect of the AAA and Wallace-Tugwell New Deal agriculture.
The NIRA, an economic disaster
The cornerstone legislation of the early New Deal economic attack was the passage of the National Industrial Recovery Act in June 1933. Roosevelt told Congress the bill would make possible, "a great cooperative movement throughout all industry in order to obtain wider reemployment, to shorten the working week, to pay a decent wage for the shorter week, and to prevent unfair competition and disastrous overproduction." As well, FDR asked for an appropriation of $3.3 billion "to start a large program of direct employment" through public works, administered initially by Harold Ickes' Public Works' Administration.
However, in the midst of a depression and collapsing business confidence, bankruptcy and ten million unemployed, to ask businesses to pay higher wages for fewer hours work and impose anti-competitive restraints on industry was self-contradictory if viewed as an attempt to stimulate private business investment and confidence.
As one critic of Roosevelt policy, Gary D. Best, noted, the NIRA was part of the theory held by those around Roosevelt referred to as the "bubble up" theory of recovery. Here recovery would come by increasing consumer purchasing power, thereby giving industry a market and stimulating new investment. By raising farmer income through the AAA, by forcing industry to hire more workers at higher pay, and employing jobless on government public works, recovery could be generated from the "bottom up." This theory, held by Tugwell, Frankfurter and others around FDR, allowed the President to make no concession to business or banking, and to make no compromise in his attack on "over-greedy businessmen seeking profit."
Unfortunately, this had little relation to reality. NIRA gave stimulus to the industries that needed it least, and ignored the heavy industry most needing it. By imposing higher wage costs on industry, before recovery, the NIRA forced businesses to either accept reduced profits or higher losses, or to raise prices, neither of which was conducive to general economic recovery in an economy based on private market principles.
The NIRA gave the President unprecedented powers over the economy and over business. With initial reluctance of businesses to file voluntary "codes of fair competition" for industry compliance with NIRA on wages, hours and prices, NRA Administrator Hugh Johnson formulated a "blanket code" to cover all industry, which led to a new stock market plunge in July. This blanket code, termed the President's Re-employment Agreement, showed the iron fist of central planning behind the NIRA, killing any hopes for voluntary compliance and self-regulation. Businesses accepting the code of wages, hours and prices would receive a Blue Eagle insignia to post as evidence of co-operation with NRA. Businesses not having the Blue Eagle faced threat of consumer boycott as "chiselers," "unpatriotic," or worse.
Significantly, just prior to unveiling of these blanket NRA codes, industrial production had begun to revive, rising from 60% of the average 1923-1925 level in March, to 98% by July 1933, with the stock market recovering in tandem. By August, when the blanket code and threats of its regimentation of business were public, both stock prices and industrial production began a sharp decline, the latter falling back to a 73% level by that November.
Even Walter Lippmann, an initial backer of the New Deal, expressed alarm at the damaging impact of the NRA on especially smaller businesses. He wrote in relation to the imposing of a blanket code on all business, "All over this country there are men with little stores who in the face of incredible difficulties have just managed to stay in business...It is intolerable to my mind that the Federal government should now reach into these towns, and without an investigation of the facts, without any knowledge of each man's circumstances, presume to make public judgment as to whether this man or that is a slacker or a patriot...In what principle of American government is there the authority for such an inquisition? To foment discord and discrimination, boycotts and bitterness in the neighbors of cities and in the towns is no way to revive business."
More alarming to many businessmen was the potential of Article 7a of the NIRA to force unionization of whole sections of U.S. industry. In the first several months after passage of the NIRA, which also established a National Labor Board to deal with labor disputes, NLB decisions invariably sided with organized labor against employers. This led to a rising labor militancy in the midst of depression. In the first five months after NIRA became law, more than 1,100 strikes involving some 1 million workers caused a loss of at least $50 millions in wages. The NLB had exclusive judicial powers to settle labor issues.
The NIRA was promoted by the Administration as being a temporary emergency expedient to jump start employment and recovery. On passage, both the Chambers of Commerce and the National Association of Manufacturers put aside initial misgivings and urged members to help make the NRA succeed for the good of the country. Within six months of implementation that attitude had turned.
Public actions and speeches by NRA Administrator Hugh Johnson and Deputy Agriculture Secretary Rexford Tugwell, confirmed the worst fears of businessmen. Johnson announced that, as the aim of the NIRA was to create jobs, the NRA could not permit more efficient companies to drive less productive competitors into difficulty. So the codes would restrict maximum hours that machinery could be worked, impose prohibitions on adding new and more efficient machinery, and restrict by regulation the entry of new companies into competition with established ones in a field. It was increasingly clear to most sensible people that the NIRA was intended to make permanent Federal economic planning in the U.S. economy, and in the process to reinforce inefficiency and retard innovation across the board, hardly stimulus to future business investment.
Increasingly, economic results confirmed that both the AAA and NIRA were failing to create recovery of the national economy. By November 1933 evidence indicated the contrary, a loss of confidence in New Deal policies for the economy, fear of regimentation and worse. The London Economist noted that, "the wage-rising policy has already begun, by raising costs, to check the original speculative revival," adding that the Roosevelt Administration now would have to, "find some way of increasing consumers' incomes without increasing costs, and to find it soon. Mr. Roosevelt still insists that he has converted a 'downward drift' into an 'upward surge' despite all of the evidence to the contrary."
Lippmann in late 1933 criticized the NIRA, calling it an ill-timed reform that was only working to the detriment of recovery, by stimulating consumer goods industries and not the hard hit durable goods industries needing most help. Lippmann noted that the New Deal, while trying to expand credit in the economy, at the same time was, "threatening those who use credit and direct its flow with dire penalties, not only for misbehavior but for negligence, with drastic taxation of potential profits, with severe regulation of all kinds of corporate enterprise." Because of the new NRA codes, within three months the price of finished textiles, as one example, had been driven up by 50% to 100%, a boon to the textile industry, only not a boon to millions of consumers who suddenly had to find twice as much money to clothe their families in a depression.
In October 1933 at a press conference, FDR rejected growing criticism of his anti-business policies, particularly the chilling effect of the Securities Act of 1933 on new stock underwriting. Roosevelt claimed there was excess capacities in industries such as steel and cement, calling them an example of the waste of investors' money. Roosevelt said the flow of money and investment in the economy must be controlled and planned, a cornerstone of the Frankfurter-Brandeis philosophy of centrally planned investment, to be directed by civil servants of the Federal government.
Exemplary of the self-contradictory policies of the New Deal were the initial efforts of Harry Hopkins' Civil Works Administration, which was given $400 million in November 1933 in a bid to put 4 million unemployed to work over the winter, for 30 hours a week at prevailing wages. As it was, Hopkins' CWA wage rates were overly generous, and exceeded NRA industry wages, giving the relief workers higher wages than workers in normal industry. Even FDR supporters had to warn Hopkins and FDR that the CWA risked, "increasing unemployment faster than you can relieve it." As one example, workers in Toledo were quitting factory jobs paying 35 to 40 cents an hour to go on the relief rolls of CWA for 50 cents. The Federal Reserve Bulletin on the economy in late 1933, remarked that the sharp drop in industrial output had been, "marked in industries in which AAA processing taxes or NRA codes have become effective recently."
The 'Frankfurter school'
A second, and increasingly influential faction of inner circle around FDR grouped around Harvard Law School Professor Felix Frankfurter, and his close friend, Supreme Court Justice Louis Brandeis. The Frankfurter group overlapped the Tugwell central planning faction, around their mutual hostility to banking and finance. Frankfurter turned increasingly towards a socialist outlook, without using the word, during a winter spent in England in 1933-1934 where his earlier friendship with London School of Economics Marxist economics professor, Harold Laski deepened. Laski, the inspiration for Labour Party nationalization of coal, steel and other industry after the war as well as of the Beveridge Plan creating the British postwar Welfare State, enjoyed regular access to FDR whenever he visited Washington in the mid-1930's which was often. While in London that winter, Frankfurter also cultivated a friendship with economist John Maynard Keynes, recruiting Keynes to advise the New Deal on recovery.
Frankfurter selected key people to staff the New Deal bureaucracy, thus securing his influence on evolution of regulatory and other New Deal policy implementation. His students from Harvard included Benjamin Cohen, Tommy Corcoran, James Landis, and others. Frankfurter's outlook was embodied in the phrase, social engineering, with the Federal government as regulator. In March 1935 Frankfurter convinced FDR to appoint Frankfurter's law student and close friend, Thomas Corcoran, to be FDR's White House adviser, giving Frankfurter far more hands-on ability to direct priorities for the President based on Frankfurter's personal agenda, an agenda consistently hostile to business.
In this respect, Frankfurter was not that different from Professor Tugwell. Frankfurter, however, preferred to wield power as architect and drafter of key legislation which would create the regulatory apparatus. Exemplary of this was the Securities & Exchange Commission created by the Securities an Exchange Act of 1934, a law drafted by Frankfurter's people without so much as consultation with even Harvard Business School colleagues, let alone businessmen or bankers, as to its likely chilling effect on capital markets. Like most New Deal legislation, it later had to be significantly modified to the SEC we know today.
Frankfurter enjoyed extraordinary influence over FDR's thinking on legislation and business, directly and indirectly through Corcoran and others. In October 1933 Frankfurter wrote to the President on the growing expressions of business discontent with New Deal programs and their lack of effect on recovery. Frankfurter played to FDR's own anti-business sentiment, writing that news of the business discontent, "will, I am sure, only whet your appetite for the joy of battle (with business)." Frankfurter's influence rose, as Tugwell's waned in the early New Deal, leading Tugwell to complain bitterly.
In 1934, Frankfurter urged FDR to wage his war against business, a cornerstone of the "reformer" faction agenda, by using the depression to implement a vast-ranging social agenda under guise of recovery. Frankfurter told the President, that the Administration faced an "irrepressible conflict" with business, one that would come to a head sooner or later. Frankfurter counseled that Roosevelt did not have to declare war verbally, but that the President should, "recognize that there is war and act on that assumption."
Writing to FDR from England in December 1933, Frankfurter stated that, "lines were fast being drawn between those to whom Recovery meant Return—return to the good old days—and those for whom Recovery was Reform—transformation by gradual process, but radical transformation no less, of our social and economic arrangements." In short, Frankfurter used his enormous influence to urge the President to wage de facto class war against business rather than against economic depression, though clothed in rhetoric of war on economic depression.
The proper role of government in combating depression
The issue in the 1930's was not a question of government intervention or non-intervention. Herbert Hoover had long ago established that Government must play a vital, pro-active role in turning the economy around, and created the Reconstruction Finance Corporation among other means to try to do that. Rather, it was a question of the nature and purpose of that government intervention.
A group around Treasury Secretary Morgenthau, and Cornell economist, Dr. George Warren, were a minority view in the first Hundred Days of FDR policy. They advocated immediate leaving of the constrictive Gold Standard as England had done in 1931, and inflating the money supply by the Federal Reserve to get credit into the economy and restart business production, in the process reducing the relative debt burden of companies and restoring purchasing power to end the deflation process. They were outflanked by both the Tugwell group and the Frankfurter group, both of whom advocated a barely-concealed attack on business.
Even once-pro-New Deal journalists, including Walter Lippmann, criticized the Roosevelt programs for unnecessarily attacking business and hindering business investment owing to the enormous uncertainty of Roosevelt policies for business. Most embarrassing however, was an open letter to FDR by Britain’s John Maynard Keynes to the New York Times in December 1933. In the letter, Keynes said the Roosevelt Administration had erred in giving priority to reform over recovery and had confused the symptoms of recovery with recovery itself.
Keynes told Roosevelt, for example, that rising prices were to be welcomed when they resulted from increased output and employment. But it was impossible, he added, to reverse the process and try to stimulate output and employment by raising prices. The latter only reduced demand and resulted in less rather than more employment. The NRA, Keynes said, "was essentially reform, and probably impedes recovery."
In early 1935, Keynes, while urging FDR to drop his stance of hostile confrontation with the business community, and enlist their friendly cooperation, had proposed that the President embark on a very aggressive program of public spending to come out of the depression. FDR took the precise dollar amount recommended by Keynes, the then-huge sum of $4.8 billion a year, and put it into a Work Relief Bill passed in March 1935.
However, Keynes had also proposed the public spending go for economically useful infrastructure, such as railroad modernization and other infrastructure improvements which would leave the national economy more efficient. Keynes envisioned the government spending on such a scale would be able in turn to revive the most depressed sectors of durable goods manufacture in the economy and prepare the way for sustained private sector growth.
Instead, while embracing Keynes' proposal as to the amount of government spending, FDR put it into little more than work relief programs under Harry Hopkins' CWA. Even Treasury Secretary Henry Morgenthau in his private diary, worried that the $4.8 billion "is being flitted away with no centralized plan..."
When Roosevelt told Yale economist and early New Deal adviser, Irving Fisher, of his plans for economic stimulus in late 1934, Fisher wrote that FDR had told him it would "cost about $5 billion to provide for five million men for one year. He was thinking in terms of employment by the Government rather than reemployment in private industry." Fisher unsuccessfully urged the President instead to dedicate the money to bringing private industry to reemploy those people instead. The Washington Post, perceptively, recognized in the apparent lack of a plan in spending the vast public works funds, an attempt by the Roosevelt Administration "to create a feeling of mass contentment, however transient, on the eve of the 1936 election."
In 1934, a group of prominent Harvard economists, including Seymour Harris and Joseph Schumpeter published a critical assessment of Roosevelt economic programs. Schumpeter bluntly declared that Roosevelt's attempts to generate an artificial recovery were making it impossible for capitalism to function. The heart of a productive market economy is the ability of firms to earn profit, precisely what the New Deal ideologues attacked as the evil.
Later, during the 1937 renewed slide back into economic depression, following the end of Government "pump priming" election spending, Keynes urged FDR not to continue his hostility to business. Keynes explained repeatedly to the President that the idea of public spending made sense only as a temporary bridge, until the private sector economy was able to invest and grow again, and spending on economically productive projects such as modernization of transport infrastructure, not make-work "leaf-raking" jobs.
Frankfurter and others around the President had little interest in such fine points. Keynes' public spending was embraced, while Keynes' admonition about not alienating business was ignored until late 1939, when Treasury Secretary Morgenthau, Commerce Secretary Harry Hopkins and other economic realists finally convinced Roosevelt to bring seasoned businessmen into his Administration for the first time. Roosevelt was turning his sights on prospects of entering the War, and realized he needed business to mobilize the economy for such a war effort.
The effects of the New Deal economic measures from 1933 through to Pearl Harbor and onset of World War II in December 1941, were staggering. While much of the legislation of the era is remembered favorably today, what has survived did so in greatly mutated and softened form. The NRA was dropped as a political liability, with Roosevelt opportunistically blaming "reactionary and aged" Supreme Court Justices for its failure. The intervention into agriculture by the AAA persists through to today, and numerous other government agencies have established permanent bureaucratic intervention into the smallest details of everyday private economic life.
The basis of the New Deal economic strategy rested on an expansion of the economic weight of the Federal government in relation to private sector activity. This was perhaps the most profound and damaging distortion of the New Deal on American economic dynamism. That distortion was disguised by the onset of War and later, after 1948, by the huge military funding needs of a Cold War.
In 1932, just before Roosevelt won election for the first of an unprecedented four terms, Federal debt stood at some $30 billion. By 1941 it had risen to over $70 billion, and by 1945 to almost $280 billion, almost a tenfold rise in little more than a decade. More significantly, Federal government purchases of goods and services rose dramatically. At the time of the stock market crash in 1929, a mere 2.5% of GDP consisted of federal expenditures. That increased to a staggering 45% of GDP by 1945.
By the 1960's Federal spending still comprised 25% of GDP. It took some four decades to bring that ratio of public GDP to private down to a level below 20% by the late 1980's. In some areas of daily economic life, the legacy of Roosevelt's economic policies has yet to be corrected. In the broadest sense, the Vienna-born Frankfurter and others in FDR's original Brain Trust group, pursued policies more Continental European in direction than American in terms of the checks and balances of the Constitutional system, and the nurturing of the potentials of a market-based economy. In many respects those policies acted as a major drag on innovation and growth through to the end of the Cold War.
The issue was not, as later ideologues tried to portray it, between a State role versus no State role in the economy. The Federal government could and should play a significant role in guiding broad economic developments, but, without at the same time sabotaging the development of private sector growth. FDR's Brain Trust had another agenda in the early years of the New Deal, and that agenda caused the Nation and the world many years more economic depression than were necessary.
Franklin Delano Roosevelt had been elected President of the United States in November 1932 to lead the Nation and the economy into recovery and prosperity. He presided over a national economy which had evolved over a period of some three hundred years into a complex interaction of private enterprise, one based on a profit risk-reward calculus. Rather than addressing how to restore investment in that private sector, FDR's New Deal Brain Trust concentrated instead in using the great crisis to impose a social agenda.