Most University Economics Departments don't argue this point any longer. But "Roosevelt saved us during the Depression" is still gospel in most History and Political Science departments.
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THINKING THINGS OVER
Prolonging the Depression
The New Deal: Time for a new look.
BY ROBERT L. BARTLEY
Monday, October 20, 2003 12:01 a.m.
Peace, in setting presidential reputations, far outranks its brother prosperity. I didn't realize how completely war and peace define our presidents until I was asked to think about their economic leadership.
Our OpinionJournal.com and the Federalist Society sponsored a new rating of the presidents, and in June an expanded print version will be published in collaboration with Simon & Schuster. I was asked to join William Bennett, Richard Brookhiser, Robert Dallek and others in contributing. Asked about leadership on economic policy, I couldn't find much.
Yes, Washington was smart enough to hire Alexander Hamilton, as Lincoln hired Jay Cooke to finance the Civil War by inventing war bonds. In hands-on terms, Andrew Jackson personally destroyed the second Bank of the United States, a medium-sized calamity for the Republic's finances. Ronald Reagan tamed the economic crisis he was elected to face, but went on to greater glory by defeating communism in the Cold War.
The great puzzle is Franklin D. Roosevelt. He made his mark defeating Adolf Hitler, which earns him ratings as the top president of the 20th century. But he was originally elected to cure the Great Depression; how did he do there? Unemployment was still above 17% on the eve of war in 1939. Most of Roosevelt's acolytes settle for saying he lifted the nation's spirits.
Now comes historian Jim Powell of the Cato Institute, with a new book arguing that Roosevelt's policies actually prolonged the Depression. "FDR's Folly" is endorsed by two Nobel Prize economists, Milton Friedman and James Buchanan, and cites a plethora of economic studies.
Mr. Powell serves to remind us what Roosevelt did: Close the banks. Break up the big and diversified banks in favor of one-branch banks where the problem was. Expropriate private holdings of gold. Mark up the gold price in dollars in an attempt to raise agricultural prices. (Undersecretary of the Treasury Dean Acheson resigned in protest against this devaluation of the dollar, a point for reflection by the Bush entourage currently touring Asia to peddle a cheap dollar.)
The New Deal tried to organize industries into cartels to keep prices up. But it also sponsored a torrent of antitrust suits against industry colluding to keep prices up. It started new welfare plans, notably Social Security, financed by a tax on employment kicking in before benefit payments did. Above all, Roosevelt raised taxes on "the rich." An "undistributed profits tax" even blocked corporations from accumulating internal capital.
From the standpoint of the 21st century, it beggars the imagination that anyone could see this witches' brew as a recovery plan. But the mythology of the New Deal lingers today, and we badly need a new debate on this part of our history. I hope that Mr. Powell's book succeeds in sparking one.
That would be achievement enough for any one book, but this is not quite the book I would have written. Mr. Powell adopts the Milton Friedman view of the Depression--that it resulted primarily because an ignorant Federal Reserve let the money supply shrink, instead of maintaining steady growth. This view is for sure a big advance on the conventional wisdom. That is, it sees the Depression as the result of policy mistakes, not a spontaneous market failure.
I prefer the explanation offered by Robert Mundell, another Nobel Prize economist and my own longtime guru. In his Nobel lecture he stressed the failure of the international monetary mechanism; World War I disrupted the gold standard, and leading central banks had not constructed a good alternative. The result was a shortage of world liquidity, setting off a chain reaction of bad policies around the globe.
From this viewpoint, I would lay the first blame not on FDR but on Herbert Hoover, who was after all on watch when disaster struck. Mr. Powell ably recounts Hoover's mistakes in signing the Smoot-Hawley Tariff, and in vainly trying to balance the budget by raising taxes in 1932. The Republican president boosted the top marginal rate to 63% from 25%; Roosevelt took it to 75% and then 91%.
Hoover also started many of the New Deal measures, for example the Federal Home Loan Bank System that melted down in the 1990-91 recession. Most importantly, he was the original proponent of the notion of spontaneous market failure. In my view the decisive turn was not FDR's electoral landslide, but Hoover's rejection of his first Treasury secretary, Andrew Mellon.
As the downturn lingered, tensions also developed between President Roosevelt and his Treasury secretary. Henry Morgenthau came to see that a relentless attack on the business class was not a prescription for recovery. Bob Mundell called my attention to some remarkable passages in John Morton Blum's "From the Morgenthau Diaries."
Morgenthau anticipated the Laffer Curve: "Of course we must have additional revenue, but in my opinion the way to make it is for businessmen to make more money." He put a plan to cut top marginal tax rates before the president, who snorted "A Mellon plan of taxation." FDR went on to ridicule the sign on Morgenthau's desk, "Does It Contribute to Recovery," proclaiming instead, "This is politics." Morgenthau's diary complains, "This lecture went on and on, he saying that this was going backwards and that this simply would mean that we would have a fascist President."
The New Deal, that is, was not about economic recovery, but about displacing business as the nation's predominant elite. FDR harked back to the founder of his party. In his 1832 veto of renewing the Bank's charter, Jackson complained that its profits went to foreigners and "a few hundred of our own citizens, chiefly of the richest class." Daniel Webster replied that the message "wantonly attacks whole classes of the people, for the purpose of turning against them the prejudices and the resentments of other classes." The tradition, of course, runs strong even today in the party of Jackson and Roosevelt.
Mr. Bartley is editor emeritus of The Wall Street Journal. His column appears Mondays in the Journal and on OpinionJournal.com.
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