Franklin Roosevelt and the Greatest Economic Myth of the Twentieth Century
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Textbooks galore point out that President Franklin Roosevelt left a permanent stamp on the American economy. But no textbook in print explains how Roosevelt promoted what is probably the greatest economic myth of the twentieth century: the view that capitalism caused the Great Depression.
During the 1932 campaign against Herbert Hoover, Roosevelt repeated in speech after speech his view that free markets had failed America. During that election year, the U.S. economy was in tatters: 25 percent unemployment, a plummeting stock market, and rampant pessimism sapped American morale. To audiences all over the nation, Roosevelt expounded his theory of why capitalism had failed.
The boom of the 1920s had created a maldistribution of wealth, Roosevelt alleged. The rich were getting richer and the poor poorer. "Corporate profit resulting from this period was enormous," Roosevelt argued, but "very little of it went into increased wages; the worker was forgotten."1
In fact, the poor were getting so poor they could no longer consume enough to support a robust economy, and so naturally it collapsed into depression. The solution, Roosevelt pledged, was New Deal programs for the purpose "of meeting the problem of underconsumption, of adjusting production to consumption, of distributing wealth and products more equitably."2 Economists called Roosevelt's diagnosis the "underconsumption" thesis.
During the campaign Roosevelt often flayed the capitalists, whose power had "become so disproportionate as to dry up purchasing power within any other group. . . . It is a proper concern of the Government to use wise measures of regulation which will bring this purchasing power back to normal."3 In another speech, he said that "if the process of concentration goes on at the same rate, at the end of another century we shall have all American industry controlled by a dozen corporations, and run by perhaps a hundred men. Put plainly, we are steering a steady course toward economic oligarchy, if we are not there already."4
The underconsumption thesis was not original with Roosevelt, but he acted on it and did more to popularize it than anyone else. But is it valid? Does the evidence support the view that (1) wealth was becoming increasingly concentrated during the 1920s, and (2) that industrial workers were not able to consume adequately because they were receiving a steadily smaller share of corporate earnings during the 1920s?
The economic statistics collected during the 1920s and 1930s give little support to Roosevelt's ideas. In 1921 the percentage of national income received by the top 5 percent of the population was 25.5. That share remained stable throughout the decade, and by 1929 the top 5 percent received 26.09 percent of the national income.5 Does that microscopic increase really suggest, as Roosevelt charged, that we were "steering a steady course toward economic oligarchy, if we are not there already"?
On the second issue of worker earnings, the evidence directly refutes Roosevelt's charges. The employee share of corporate income did not decline, but instead steadily increased during the 1920s-from under 70 percent in 1920 to well over 70 percent during the last years of the decade.6
As Peter Temin, an economist at MIT, concluded, "The ratio of consumption to national income was not falling in the 1920s. An underconsumption view of the 1920s, therefore, is untenable." As of 1976, Temin observed, "the concept of underconsumption has been abandoned in modern discussions of macroeconomics."7 In other words, the economic idea that inspired Roosevelt to launch the New Deal was so discredited it was no longer even discussed by economists just one generation after Roosevelt's death... |
