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The New Deal's War Against Economic Recovery

The New Deal's War Against Economic Recovery

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October 22, 2010

July/August 2000 -- The New Deal "was not just a matter of staving off hunger," wrote Arthur Schlesinger in The Age of Roosevelt: The Coming of The New Deal. "It was a matter of seeing whether a representative democracy could conquer economic collapse." Schlesinger went on to say that, "The only hope lay in governmental leadership of a power and will which representative institutions seemed impotent to produce." Over the years, Schlesinger and many other historians have claimed to find such superior leadership in Franklin Roosevelt.

"He lived by his exultation in distant horizons and uncharted seas," Schlesinger swooned. "It was this which gave him confidence and loyalty in a frightened age when the air was filled with the sound of certitudes cracking on every side-this and the conviction of plain people that he had given them head and heart and would not cease fighting for their cause." In Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933-1938 (New York: Praeger, 1991), Gary Dean Best has shattered these and other myths about Roosevelt's New Deal, replacing them with an objective view of Roosevelt's blind anti-business, anti-free market animus.

A professor of history at the University of Hawaii at Hilo, Best has written a multitude of books on interwar America, including The Politics of American Individualism: Herbert Hoover in Transition, 1918-1921 (Greenwood, 1975), Herbert Hoover: The Postpresidential Years, 1933-64 (2 volumes, Hoover Institute Press, 1983), The Nickel and Dime Decade: American Popular Culture in the 1930s (Praeger, 1991), FDR and the Bonus Marchers, 1933-1935 (Praeger, 1992), The Critical Press and the New Deal: The Press versus Presidential Power, 1933-38 (Praeger, 1993), as well as many others.

This summer, Best is a resident scholar at the Social Philosophy and Policy Center at Bowling Green State University. While there, he is working on a book, tentatively entitledWhen Liberalism Took a Left, which examines the changes that took place in American liberalism during the New Deal years.

Navigator: In your book, Pride, Prejudice, and Politics, you lay down a clear standard by which to measure the New Deal: Did it bring about economic recovery? But let us begin with a logically prior issue: Where did matters stand, economically, before Franklin Roosevelt came to office?

Best: Well, the United States had begun to turn around in the summer of 1932. And that was characteristic of the entire world, not just the U.S. The entire world pretty much hit bottom in the summer of '32 and turned upward. And then we had the election of '32, which threw a great deal of uncertainty into the business situation, with special concerns over the possibility of Roosevelt's pursuing inflationary policies, taking us off the gold standard, for example. All of this contributed to a rush, I suppose you could call it, on the part of large savers and investors to convert money into inflation-proof investments-like land, gold, diamonds, and so on-which eventually trickled down to smaller savers and depositors, who also began to make their runs on the bank. By late February of '33, we had a major crisis in banking. And of course it got worse as we got closer to Roosevelt's Inauguration Day, which was March 4, 1933.

Navigator: Had these inflationary policies been discussed during the election?

Best: Inflationary policies were not discussed during the election as much as they were during the interregnum. A great many people were saying that what the country needed was to go off the gold standard and pursue inflationary policies, and Roosevelt was not saying that he would not do so. He was quite obviously taking counsel with those people. So, the general impression was that Roosevelt was considering such policies and there was also considerable feeling that if Roosevelt didn't take such steps, Congress might go ahead and do so regardless of how he felt.

You see, there was a lot of doubt about what kind of man Roosevelt was, what kind of president he was going to be. Some people saw the possibility in Roosevelt of a very dynamic leader; others wondered if he really had the ability to govern. But those who had doubts about his abilities were afraid that Congress might just take the bull by the horns and push through all kinds of radical things that they had been talking about.

Navigator: Your book mentions that Roosevelt had a weak Cabinet but forceful advisors, and you lay out an interesting division among three groups of advisors, two of which preferred Left-wing political reform to economic recovery. Could you elaborate on that schema?

Best: Well, I don't think this is original with me. But there were the monetarists-people who believed that the solution to the Depression lay in inflationary policies, which would in a sense repudiate the great mass of debt left over from the 1920s and restore purchasing power to the people.

Then there were the planners, who were led by people like Rexford Tugwell, Raymond Moley, and Adolf Berle, who for the most part had the view that production, distribution, prices, wages, and so forth, should be set to one degree or another by the federal government. This was the way not only to bring about the recovery from the Great Depression but also to make sure that there wouldn't be any future depressions. Some of these people owed their ideas to people like Herbert Croly and others of that stripe, to World War I's economic mobilization, and to the new nationalism of Theodore Roosevelt. But for some, like Rexford Tugwell [previously a Columbia University economics professor], the source of their ideas lay in Europe and in the social democracy of the revisionist-Marxists. Tugwell clearly wanted to bring about a collectivized society.

Then, third, there were the Brandeisians who continued to hold to the kind of world-view that [Supreme Court Justice Louis] Brandeis had advocated back in the early twentieth century: that of trying to restore the American economy to an earlier age of small businesses and small labor, absent the control of Wall Street.

Navigator: You just referred to the revisionist-Marxists of Europe. Whom, specifically, were you thinking of?

Best: Well, it would go back to Eduard Bernstein [1850-1932], back to the turn-of-the-century when a great number of Marxists came to the conclusion that revolution was not inevitable and indeed was impractical. But with the growth of Marxist political parties, in countries like Germany, they thought the destiny of Marxism lay in gaining parliamentary control.

Navigator: Now, the Brandeisians: Who was their point man in the White House? Felix Frankfurter?

Best: Frankfurter was generally regarded as Brandeis's disciple. But Frankfurter, by the 1930s, had begun to be heavily influenced by Harold Laski, the British Marxist. So by the early 1930s, Frankfurter was closer to people like Tugwell than he was to Brandeis.

Navigator: Who was a New Deal Brandeisian, then?

Best: Tommy Corcoran was probably the leading Brandeisian in the administration, but there were also Benjamin Cohen and various others. [Corcoran and Cohen had been law students of Felix Frankfurter at Harvard.]

Navigator: Am I correct in thinking that Justice Brandeis was actually in touch with the executive branch at this time?

Best: Oh, Brandeis was very much in touch. In fact, a fellow at Penn State, Bruce Murphy, has done an entire book on the involvement of Brandeis and Frankfurter in the government during their periods on the Supreme Court.

Navigator: That is not supposed to happen, is it?

Best: It's not supposed to, no, but Brandeis especially was very passionate about the things that he believed in. By all accounts, when he described his economic philosophy his eyes turned to fire and people would just sit there amazed, not only because of his passion but because his views were so anachronistic by the 1930s.

Navigator: They were Jeffersonian, economically?

Best: Yes. It was the idea that you could turn back from the big industries of the United States that existed in the 1930s and return to an economy made up of small economic units, and it was just totally impractical by that time.

Navigator: Okay, let's get to the heart of your book, which is judging what the New Deal did and how it affected the economy? What was the "legislation of 1934"?

Best: I don't have the book in front of me, but I was probably referring to the Securities and Exchange Act of 1934, which was primarily a Brandeisian piece of legislation, designed to bring about further federal control over the stock exchanges. There were also some revisions made in the Securities Act of 1933, responding to criticism of it, to try to make it a little more responsive to the needs of Wall Street. The 1933 act was so punitive, against so many people, that it virtually strangled the flotation of any stock issues in '33 and '34, which of course was exactly what some of its supporters wanted-the Brandeisians, for example. If they had had their way, all stocks and bonds would have been floated through the U.S. Post Office.

Navigator: One major theme of your work is that, during the New Deal, businessmen did not dare engage in productive activity because of the rhetoric that was coming out of the administration and the possibility that it would be enacted into legislation. Could you give us some flavor of that?

Best: Well, you could begin with Roosevelt's inaugural address in March of 1933, which started fomenting class

antagonisms from the get-go, attacking the profit motive, attacking businessmen, and attacking banking.

Really, nothing happened after his inaugural speech that was any worse than that. A lot of historians dwell on the savagery of his attacks on business during the 1936 campaign and declare that they were only a response to what business had been saying about him. In fact, he said nothing in 1936 that he hadn't said in that inaugural address in March 1933. The war began the day of his inauguration.

Navigator: I gather that there were occasional attempts to patch things up, but they were never carried through.

Best: Yes. You have to remember that Felix Frankfurter was constantly at Roosevelt's ear. Many of the people in the Roosevelt administration were very jealous of Frankfurter's access to Roosevelt; they talked about him being there next to Roosevelt in the evenings, having long conversations. Frankfurter was continually counseling Roosevelt to wage war against businessmen and bankers. And so was Harold Laski, who also had virtually unlimited access to the White House whenever he was in the United States. These people were continually counseling Roosevelt not to let up, to keep the war against business going.

Navigator: So, whenever they saw the administration making a peace overture, they would squelch it?

Best: Yes. They were telling Roosevelt that businessmen and bankers were only going to see this as a sign of weakness, and he couldn't let them think that he was giving into him. They knew all of the ways to fire him up.

Navigator: You speak of "the first Roosevelt Depression of 1934." In addition to the war against producers, what brought it about? And what was the magnitude of it?

Best: Well, a number of factors probably contributed to it, just as many of the same factors contributed in 1937. There was a wage-price spiral; there was massive labor unrest, set off by the National Industrial Recovery Act and the concessions that it made to labor. Both of these things contributed to it, and also of course the beginnings of the National Recovery Administration and the Agricultural Adjustment Administration in late '33. These had also contributed to it.

Now, "the first Roosevelt Depression," as I call it, brought the economy back down to the low point of 1932. It pretty much erased all the gains that had been made since then. It didn't bring it down to the level of the banking crisis of 1933, obviously, because the banks weren't closed, but, outside of that, the depression erased all the gains that had been made. And the economy didn't go anywhere until the Supreme Court invalidated the National Recovery Act in May 1935. That brought about a fairly instant recovery. The economy began to march upward because business now had the feeling that, no matter what Roosevelt tried to do to them, the Supreme Court was going to be their defender.

Navigator: Why, if there was a "Roosevelt depression" in 1934, was he re-elected by a landslide in 1936? He took all but two states in the Electoral College.

Best: Well, the straw man of the '36 election was a Literary Digest poll, which was very unscientific and showed [Republican candidate Alf] Landon beating Roosevelt. But on a more scientific note, [George] Gallup was already doing very scientific polls and early in 1936 these showed Roosevelt being defeated, even by an unnamed Republican candidate. The Democratic National Committee polls were also showing that Roosevelt would be beaten. So Roosevelt's popularity in '36 is largely a myth.

The Republicans, however, had no really attractive candidates to put up against Roosevelt, and Landon turned out to be a disaster. No sooner had Landon been nominated than Roosevelt quickly took the lead in the polls and by the last week before the election Gallup showed Landon carrying only three states. In those days, Gallup did not poll right up to the evening before the election, otherwise he probably would have shown Landon winning only the two states-Maine and Vermont-that he actually did win.

You have to remember also that a large percentage of the American people were being subsidized in one way or another by the Roosevelt administration. In 1936, there were at least ten million people who were still on welfare, and the Gallup polls consistently showed that 85 to 90 percent of them voted Democratic. Plus the farmers, for all of their displeasure over aspects of AAA [Agricultural Adjustment Administration], were nevertheless dependent to a considerable extent on its subsidies.

Navigator: And there was a fairly large disbursement of federal money in '36, wasn't there?

Best: There was an incredible disbursement of money just before the election. In my book, I quote some White House conversations that took place just prior to the elections, and it is interesting that right up until election day Roosevelt was afraid that he was going to lose. He was literally screaming at his people to "get that money out there." Even though the money wasn't supposed to go out until a week or two after election day, he wanted it out there before election day. He

did not want to let any vote escape unbought.

Navigator: Speaking of polls, I had not realized the extent to which the American people genuinely feared that Roosevelt would become a dictator.

Best: You certainly don't get that from other New Deal histories, do you?

Navigator: No. But your work has some fascinating poll results and some quotations from Walter Lippmann that are relevant to the subject. I was wondering if you could elaborate on them.

Best: As early as 1933, many people had begun to experience a great deal of anxiety over the kind of powers that Roosevelt was acquiring through various laws. One of the greatest difficulties was the fact that many of these laws were discretionary. Congress was not telling Roosevelt "You will do this" or "You won't do that." It was telling Roosevelt that he could do this if he wanted to, and so the decision about whether he actually did it was left to Roosevelt. What this did was create an enormous uncertainty. I think it was the progressive Amos Pinchot who referred to Roosevelt as "the great uncertainty," because one never knew which of these discretionary powers he would use and which he wouldn't. They were just sitting there like time bombs, smoldering.

But certainly by 1935, people like Walter Lippmann, who had been critical of journalists's raising fears of dictatorship, came around to an understanding of what Roosevelt had in mind and began to experience the same kinds of concerns; Lippmann then began to voice these fears in his column. As I point out in the book, a Gallup poll showed that 45 percent of those responding believed that Roosevelt's policies were leading to a dictatorship. And apparently Roosevelt felt so much pressure because of this that he got up in the middle of the night while he was down in Warm Springs and released a letter to the press corps disclaiming any interest in or intention of becoming a dictator. All of which is a little startling. It's startling that a pollster would even ask that question, never mind the fact that almost half of the American people

responded yes.

Navigator: How did the second Roosevelt Depression begin?

Best: There were a lot of different factors, including the massive election-eve spending in 1936, the payment of the veterans' bonus, and then all of the millions that had to be paid out by companies as dividends, bonuses, and increased wages as a result of the Undistributed Profits Tax. As a result, there was an upward wage-price spiral, and this began to frighten people in the Treasury and in the Federal Reserve. Now, whether these fears were valid or not, I don't know, but that is beside the point because people were terrified. They saw the prospect of rising interest rates and realized that would jeopardize the massive bank holdings of low-interest government bonds, by which the deficit had been financed. [Treasuary Secretary Henry] Morgenthau took great pride in the fact that he had been able to sell these bonds at ridiculously low interest rates. But now there was the prospect of banks' being able to lend money at higher rates and just jettisoning federal bonds for whatever they would bring, with possible detriment to federal credit and maybe even to the whole banking system. So for that reason, more than the reasons generally given by historians, there was a great deal of pressure on Roosevelt to balance the budget in order to head off this price-wage spiral and all of the potentially detrimental results that might come from it.

And Roosevelt did move, in '37, to balance the budget. The problem was that, at the same time the federal government was reducing its spending and its contribution to consumer purchasing power, consumer purchasing power was already being eroded by rising prices. As a result of this outlook for buying power, there was a precipitous collapse of the stock market in late 1937 and the onset of a new depression. The collapse of the stock market this time was worse than in 1929. And the depression that began pretty much continued on until 1941.

Navigator: What happened on the political front, after the '36 election?

Best: Well, Roosevelt was not in the same position that he was in early '33. All of his recovery programs had failed. The old cry of "We're on our way" just didn't ring true anymore. By the winter of '37-'38, he was trying to ignore what was happening all around him; he hadn't a clue about what should be done. Finally, under the pressure of his advisors, he decided to revert to the tried-and-true, that is, another massive spending program. As I recall, he was asking for $3 billion in deficit spending. But Congress wouldn't give him that much; I don't recall how much they gave him but I think it was closer to $2 billion. That was the best he could do in 1938. So, the impression in the government was that Roosevelt had shot his bolt, that the New Deal had lost its popularity, that the happy days were over.

Then, in the Florida primary, during the summer of 1938, Claude Pepper-an avowed, 100 percent New Dealer-won the Democratic primary. That gave a new vigor to Roosevelt and to the New Dealers and convinced them that they weren't as unpopular as they had thought they were. So they began to press for all sorts of New Deal legislation again.

The interesting thing is that the press gave enormous coverage to that Pepper victory in Florida, but on the same day a 100 percent pro-New Dealer in South Dakota came in third in the Democratic primary, and the Republican primary vote was much larger than the combined vote in the Democratic primary. That turned out to be much more indicative of where the New Deal's fortunes were in 1938 than was Pepper's primary victory.

Anyway, on the strength of this new vision of his popularity, Roosevelt set out to use the Democratic primaries to purge those Democratic Senators who had opposed him on the Supreme Court packing bill in 1937. As I recall, he took on seven or eight different Democratic Senators from all across the country and lost in every case. His only victory was against a Democratic Representative from New York who was a thorn in his side, but that was an entirely different situation. The Senators that he went after were opponents of his on the Supreme Court issue, and they all won.

Then, of course, in the 1938 congressional election, the Republicans staged a major turnaround, gaining 81 House seats, 8 Senate seats, and 13 Governorships. That signaled that the New Deal was dead in the water and wasn't going anywhere.

Navigator: As I understand it, that electoral rebuke, along with the continuing depression, initiated a change of mood within the administration. In December 1938, Roosevelt appointed as his Commerce Secretary Harry Hopkins, one of the earliest and strongest New Dealers, one of the last people anyone would expect to be Commerce Secretary. But along with Treasury Secretary Henry Morgenthau, Hopkins turned from being a leftist reformer to being pro-recovery.

Best: Yes, Early in 1939, Morgenthau and Hopkins began to work on Roosevelt to pursue policies that would be beneficial to business and to recovery, against the wishes of the Brandeisians, who wanted to continue to pursue the old class warfare. Morgenthau and Hopkins succeed in blunting the Corcorans and the Cohens. Also, in '39 and '40, businessmen began entering the administration as Roosevelt prepared for war.

Navigator: So, unlike many historians of this period, you see the origins of recovery rooted not in World War II spending, but in an attitudinal shift prior to the war.

Best: Well, Robert Higgs argues that recovery didn't take place even during the war, that it didn't take place until the election of a Republican Congress after the war, because all of the seeming recovery during the war was based on government spending rather than on the resumption of private investment, and the resumption of private investment didn't take place until well after the war. But certainly to the extent that there was a recovery during the war years I don't see it simply as a result of the expenditure of billions of dollars.

I think that if Roosevelt had increased his expenditures to wartime levels earlier in his presidency but had used the money in exactly the same New Deal way, then we still wouldn't have had a recovery. The difference is, with World War II, the money is not being flooded into the economy for consumer spending or consumer purchasing power. Instead, it is the old trickle-down approach, where it's going to businesses and industries to build things, and then the money is trickling down

to the workers. More workers are being hired and so on.

During the New Deal, Roosevelt had pursued what I call the bubble-up theory. You throw the money out to the consumers, and the consumers buy stuff. By that process, eventually you fuel an economic recovery. Keynes advocated a combination of the two. He didn't advocate throwing money to the consumers but having the government spend it in such ways that it would not only bring money to the consumers but also encourage the expansion of industries. So the spending, yes, contributed to the recovery but it was also the difference in the way in which the money was being spent.

Above all, however, the end of the war on business and the end of the preferences shown to labor were, in my view, the main things that contributed to the beginning of the recovery.

This article was originally published in the July/August 2000 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.

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