A Patriot's History of the Modern World

by Larry Schweikart

  Where the stabilization model went awry was that for the whole to be healthy, at any given time one of the parts might be sick; for the teeter-totter to be up, one end had to be down. Yet no democratic government would long permit its economy to stay sick, and with Keynesian rationale, it would devalue its currency, inflate, impose tariffs, or in some way seek to raise its end of the teeter-totter. Gresham’s law (“Bad money drives out good”) would arrive with deadly punctuality, as the bad money of the “cheaters” would drive out the gold reserves of the faithful nations, and the pressure would mount until the entire system collapsed. So long as one or two dominant powers, such as Britain and the United States, could withstand the currency manipulations of smaller economies, the system still worked. By the 1920s, however, the combined weight of many developed nations simultaneously seeking to buffer their own recessionary cycles proved the undoing of the entire network. And that was precisely why the heavy hand of the fascist states seemed so appealing: they did not have democratic constituencies to worry about.

  Raw Deal

  Herbert Hoover’s interventionist Progressive policies—including the RFC, increased taxation, and the Smoot-Hawley Tariff—fell far from reaching their desired goal of reassuring the markets, spooking them even further. Hoover had ignored Mellon’s advice to “liquidate everything” (allowing prices for labor and goods to fall to their natural levels and purge the rotten businesses from the economy). An inveterate planner with disproportionate faith in the ability of government to find solutions, Hoover never considered keeping his hands off the levers. Like other Progressive administrators, he believed in a static view of an economy, in which changes in taxation or regulations did not drive individuals’ future actions. For example, in the static model, if federal revenues fall, a tax hike would correct it and balance the budget. But in the dynamic world of market economics, tax hikes reverberate through all sorts of individual decisions—people’s attitudes toward future investment or consumption. John Maynard Keynes made the same miscalculations in his analyses. Tax hikes could cause federal revenues to fall further as people stopped investing (and thus creating more jobs) out of fear of higher taxes. Likewise, Hoover’s RFC fiasco had proven a textbook case of unintended consequences of a government bailout, causing more bank failures, not fewer. When U.S. unemployment reached nearly 25 percent in 1932, Herbert Hoover was finished as president. Still, the Left saw his policies as inadequate from their perspective: he hadn’t spent enough money, hadn’t implemented a full-scale socialist change. It is doubtful with the impact of the Smoot-Hawley Tariff and the Federal Reserve’s tightfistedness that Hoover could have avoided a severe recession. But by straddling the fence, Hoover ensured a crushing defeat.

  He would have lost to almost any Democrat, but his opponent in 1932 was not just “any Democrat.” Franklin D. Roosevelt was a New York elitist politician, clever and well groomed in the art of dispensing favors from his brief career as state senator and governor. Supported throughout life by his mother, FDR briefly worked in a Wall Street legal firm and had never experienced work in the private sector outside the law. But his impeccable social credentials gave him ready entry to the world of politics. No intellectual, Roosevelt was famously described by Justice Oliver Wendell Holmes as having “a second-rate intellect and a first-rate temperament.” He had a reputation for adopting any process that worked—and which advanced his career. While assistant secretary of the Navy, he embraced the time-motion studies of Frederick Winslow Taylor to the cheers of Navy brass and the dismay of the unions. Roosevelt had just enough association with the military to be credited with some familiarity with defense issues, serving as assistant secretary of the Navy from 1913 to 1920 (and developing a particular fondness for the Navy over the Army, particularly for the submarine). Although he resigned to run for vice president in 1920, FDR was already tainted by the Navy’s Newport sex scandal, in which a homosexual ring operated at the Newport Naval Training Station Hospital was infiltrated by federal agents. As assistant secretary, Roosevelt had approved the investigations and the detainment of many sailors without trial, as well as the requirement that undercover agents engage in illicit sexual acts against their will. For that, he became the target of outraged letters by local ministers in Rhode Island and Maine, and was subsequently denounced in the Senate Committee on Naval Affairs. Roosevelt dodged the accusations, using the Navy as a shield and admonishing the committee for using the branch as a political football. The episode overshadowed his strenuous opposition to President Woodrow Wilson’s demobilization of the Navy at the end of the war.28

  In 1921, Roosevelt contracted polio. His rehabilitation took five years, essentially removing him from politics and leaving him unbloodied during the victorious Republican years of the twenties. Learning to stand with leg braces, FDR downplayed his handicap and won the New York governor’s race in 1929. From there he staged his run on the U.S. presidency.29

  The 1932 election saw Roosevelt forge a broad coalition with, among others, the wealthy Joseph P. Kennedy, newspaper publisher William Randolph Hearst, and Texas political star John Nance Garner. But his success surpassed his alliances, or the fact that he came from a populous state: FDR projected a contagious optimism, convincing Americans that recovery was just around the corner. His jaunty style, clenched-teeth smile sporting his cigarette holder, and aristocratic speech patterns seemed just the right blend of class, confidence, and hope. Those qualities all concealed the fact that the new president had no comprehensive plan or well-conceived strategy. Indeed, his cabinet and advisers were torn between budget balancers and big spenders, although they almost all embraced high taxes and wealth redistribution as a means of social equality.

  Nevertheless, Roosevelt pretended to have a thoroughgoing strategy, dubbing his recovery plan for the United States the “New Deal.” But it never had a single guiding purpose or any cohesion except to pump up spending and spark the demand necessary for businesses to again invest. Keynes quantified and legitimized this approach in his 1936 book, The General Theory of Employment, Interest and Money, but FDR’s advisers had already internalized many of his earlier writings and all of them accepted the premise that consumer spending through government “pump priming” could rescue the economy. By tying their explanations of the cause of the malady to the stock market crash (a false assertion) and then tying the crash to speculation (also false), the New Dealers laid the fault of the Great Depression on the taxation and investment policies of the Harding-Coolidge administrations. What Roosevelt actually did—with an assist from Hoover and the Smoot-Hawley Tariff—was turn a cyclical recession into something much worse.

  A thorough review of New Deal policies is not needed here, having been dealt with by A Patriot’s History of the United States, Burton Folsom’s New Deal or Raw Deal?, and Amity Shlaes’s The Forgotten Man.30 Briefly, many programs to one degree or another targeted spending. The CCC (Civilian Conservation Corps) put men to work in the West and in forests, planting trees and fighting soil erosion; the PWA (Public Works Administration) and WPA (Works Progress Administration) “created” jobs (temporarily and usually just before elections) building bridges, laying sidewalks, constructing airplane hangars, even fabricating opera houses; and the minimum wage law raised wages for those lucky enough to keep their jobs after other workers were fired due to the measure. Those programs not directly focused on moving money into the market through spending attempted to provide cash another way, through higher prices mandated by government. Such reasoning stood behind the minimum wage law, as well as the National Industrial Recovery Act (1933), which permitted cartels and monopolistic pricing. Administered by the National Recovery Administration (NRA), the National Industrial Recovery Act in two years established more than 750 industry codes that set prices and wages, and generated 3,000 administrative orders, which amounted to more than 10,000 pages of regulation. Certainly some of the work under normal economic conditions might have been justified, even laudable: NRA-funded activities included
construction of the aircraft carriers USS Yorktown and Enterprise, the Boulder, Bonneville, and Grand Coulee dams, and the highway that connected Key West, Florida, with the mainland. But the dark side was that government sought to control almost all aspects of economic life, especially prices. Seamstresses were dictated to by Washington as to what they could charge to sew on a button; butchers were mandated as to what they could charge to slaughter a hog. Eventually the entire unsustainable structure and constitutionality of the NIRA was brought down by a chicken.

  The socialistic National Recovery Administration, a new, Roosevelt-era creation with far more powers than Hoover’s RFC, regulated the sale of almost all products, including chickens. Under the New Deal, a “poultry code” governed the sale of chickens from such establishments as kosher slaughterhouses in New York, where in 1934 the four Schechter brothers (Joseph, Martin, Alex, and Aaron) ran a company that sold chickens, some of which had been purchased from out of state for resale in New York City. The government descended on the Schechter Poultry Corporation and issued sixty indictments against it for permitting the sale of allegedly unhealthy chickens, leading Hugh Johnson, one of the NIRA’s authors, to call it the “sick chicken case.” The issue in Schechter Poultry Corp. v. United States involved quite literally whether a person had a right to choose his own bird for dinner, and it came before the U.S. Supreme Court in 1935. Chief Justice Charles Evans Hughes, writing the opinion for a unanimous Court, found the NIRA as a whole unconstitutional and stated that it violated fair competition. “Extraordinary conditions may call for extraordinary remedies,” he wrote. “But the argument necessarily stops short of an attempt to justify action which lies outside the sphere of constitutional authority. Extraordinary conditions do not create or enlarge constitutional power.”31

  Aside from the Glass-Steagall Act (1933) which, working from the erroneous argument that the combination of “investment banking” and “commercial banking” had spurred the stock market boom, separated investment from commercial banking, and the Social Security Act (1935), most of the New Deal legislation both failed to achieve its initial objectives and, more important, prolonged the Depression. Then there was the confiscation of bullion gold, a scheme cooked up by FDR and Treasury Secretary Henry Morgenthau to eliminate hoarding and induce spending. It robbed people of their assets, but didn’t stimulate spending. Worst of all, it remained on the books and prohibited American citizens from owning bullion gold until 1973, long after the Depression was over. Farmers, paid not to plant on some of their land under the Agricultural Adjustment Act, continued to plant almost as much on the remainder of their land and pocketed the taxpayers’ money. Farm prices remained as low as ever. Government make-work projects merely sucked tax dollars, desperately needed in the private sector, out of the economy. FDR generated revenue by raising taxes, ultimately to a high of 88 percent plus a special tax of 5 percent on all incomes over $624.00, further drawing down investment dollars.32 Perhaps the worst legislation, the minimum wage law, has been directly linked to the severe employment downturn and persistent unemployment throughout the remainder of the decade. One 1984 study by economic historian Stephen DeCanio found that virtually all unemployment after implementation of the initial minimum wage law in 1934 could be directly tied to the higher wages foisted on employers. Expectations by business owners about their future prospects plummeted when they saw labor was going to cost them at least 25 percent more under the new bill, and all hiring in the private sector stopped.33

  Another business historian, Burton Folsom, writing from the vantage point of 2009, has produced an even more damning criticism of the New Deal, arguing that Roosevelt spent as much time trying to reward friends and punish enemies with his policies as he did trying to put people to work. Opponents of Roosevelt were subjected to Internal Revenue Service audits and harassing visits from regulators, while political pals received timely government expenditures in their districts.34 All these activities were designed to get more Democrats elected, with the endgame being to so solidify the Democratic Party with federal giveaways and assistance that it could effectively bribe the electorate in the future. To a large degree it worked, with groups such as the American Association of Retired Persons (AARP) later becoming a full-time shill for the Democratic Party and its support of the bankrupt Social Security system. Tearing the Constitution to shreds, FDR’s New Deal cronies hounded, cajoled, threatened, taxed, arrested, and jailed many who refused to toe his increasingly socialist line.

  Any fantasy that Roosevelt “saved capitalism” deserves a hasty discard into the dustbin of false ideas. Unemployment had climbed back up to 19 percent in 1938, down only slightly from the Hoover peaks in 1932. But that came after billions of government dollars had been spent to no effect, other than getting Roosevelt reelected. Folsom has shown that “fixing the economy” was never the primary objective of FDR’s policies: staying in office was, and he dished out federal funds strategically to ensure a wide base of support. Ancillary legislation, such as Glass-Steagall, creation of the Federal Deposit Insurance Corporation, the Agricultural Adjustment Act, and Social Security were all policy time bombs waiting to explode in the future. Within the next sixty years, every one of those programs would create its own special problem that required yet another solution.

  Fascist Miracles

  Unable to shake off their economic distress with quasi-socialist policies, the Americans, British, and French gazed with some admiration at the recoveries they thought were taking place in Italy and Germany. Between 1929 and 1938, Italian manufacturing doubled, a growth rate that exceeded those of all the Western democracies. Overlooked was the fact that even with such “growth,” Italy claimed only 10 percent of the American share of world manufacturing (2.9 percent to America’s 28.7 percent), and that unemployment under Mussolini increased ninefold over the 1920s; Italians still spent half their income on food; and national income declined.35 Yet much of this remained hidden to outside observers, partly because of a willing suspension of disbelief and partly because of Il Duce’s propaganda machine working in tandem with his police state. State-controlled or -influenced newspapers touted the fascist miracle and the commonly used phrase of the day (which, in fact, was not true) was that “Mussolini made the trains run on time.” But in a fascist state, perception was reality.

  Likewise, Germany’s perceived economic strength came from a combination of forced work, favorable trade with southeastern Europe and Yugoslavia, and, as with Mussolini, relentless propaganda. In the first place, as historian Adam Tooze points out, the German economy had already started to recover in 1932—before the Nazis took power. A German business research institute concluded that the contraction had nearly ended in late 1932, and the Economist’s Berlin office saw a “glimmer of economic light” for Germany.36 German unemployment fell from six million in January 1933 to just under three million two years later, and national income rose sharply during that time. But by 1936 military spending exceeded 10 percent of GDP, higher than any other European country, and the balance of payments went negative in 1933—the same year Hitler announced a suspension of all debt repayments. GDP did rise, from 3.2 percent in 1933 to 6.1 percent in 1935, but the military share of GDP growth skyrocketed tenfold during that period, while the share of GDP growth due to civilian or private investment plummeted. All this was quite temporary and unsustainable, even for an iron-fisted government. Nevertheless, it was common for outsiders to assume the situation in the Axis powers was better than their own (the grass is always greener on the other side of the fence), and many in America admired Mussolini and Hitler for their economic “miracles.”

  The French also were envious of German economic health as they battled domestic labor problems, including a 1938 strike at the Renault plant that Prime Minister Édouard Daladier successfully put down. Capital steadily seeped out of France throughout the late 1930s, making its finances precarious as Hitler began his mischief in Czechoslovakia and Poland. Of course, neither Germany nor Italy enjoyed t
he kind of economic strength that Americans and French ascribed to them. German exports of chemicals and electronics, with an established postwar presence in Hungary and the Balkans, had collapsed due to inflation in the 1920s, and the German capital there was quickly replaced by investments from the British and French. German industry also faced new competition from the ubiquitous Americans, whose General Electric competed in these regions with I. G. Farben and Siemens. Germans saw such industrial encroachments as threats to national security; Foreign Minister Gustav Stresemann said without I. G. Farben and coal, there was no foreign policy, and the Austro-German customs union of 1931 was largely aimed at excluding French and British goods from their countries and breaking the western powers’ growing grip on Czechoslovakia and the Danube region.

  The Germans had less success in prying Yugoslavia and its raw materials out of the hands of western Europeans. While Hitler could strong-arm Hungary, Romania, and Bulgaria into favorable trade agreements, the western powers were able to enter into clever trade negotiations with the Yugoslavs by playing on Serbian fears of German Balkan hegemony. As a result, Yugoslavia exported almost all of its copper, magnesium, bauxite, and lead to Britain and France, firmly excluding German firms as trading partners. Given the dire raw materials deficiency in Germany, British intelligence pulled out all the stops and carefully cultivated the trade relationship with Yugoslavia.