THE EARLY NEW DEAL: GRAB-BAG OF STATIST GIMCRACK
This resumption owed no thanks to the balance of the tumultuous Hundred Days of New Deal legislation, either. Having triggered the demise of the old international order, the Roosevelt program of necessity was a purely domestic grab bag of experiments, gimmicks, and nonstarters. These ad hoc Washington interventions—the Tennessee Valley Authority (TVA), National Recovery Act (NRA), Agricultural Adjustment Act (AAA)—did little to revive the dormant machinery of market capitalism and economic wealth creation and, instead, mainly shuffled income and resources randomly among regions, industries, and even individual business firms.
Some of these New Deal schemes fueled aggregate demand but wasted economic resources, such as in the monumental destruction of the environment and capital that resulted from the TVA boondoggle. Designated by historians as a signature accomplishment of the New Deal, it in truth created at its peak only a few thousand jobs for the purpose of building inefficient dams and power plants that weren’t needed—since the region was already drowning in excess utility capacity built during the 1920s boom; and it spent hundreds of millions turning wild rivers into navigable waterways when the region already had more than adequate rail and truck capacity.
Still other classic New Deal measures did immense and long-lasting harm, such as the 1935 Wagner Act. The latter was purportedly enacted to insure collective bargaining rights, but was so badly designed that it left even giant companies legally defenseless in the face of sit-down strikes and other coercive tactics. Eventually the resulting coercive and monopolistic industrial unionism harvested the whirlwind of bankrupt rust-bucket companies in the 1980s and 1990s.
THE BLUE EAGLE CAMPAIGN:
CRONY CAPITALISM RUN AMUCK
The signature legislative action of the Hundred Days was the NRA. By all accounts it actually thwarted economic recovery once implementation got seriously underway in September 1933. The program was essentially a fascist scheme to control supply and replace the alleged “chaos” of the free market by government sanctioned industrial cartels. These were designed to restrict output, inflate wages, and jack-up prices. Operating through 500 separate lines of industry and trade, the NRA cartels would magically inflate business revenues and wages, thereby reflating investment and household consumption. The wheels of the depression-stricken economy would thus be set back in motion.
Adam Smith had wisely admonished, of course, that whenever more than two capitalists confer, a conspiracy in restraint of trade is likely being hatched. In this respect, the NRA left nothing to chance: it actually forced competitors to join industrial syndicates and promulgate precise codes on the manner in which competition would be restricted and prices rigged.
Not surprisingly, a riot of abuse broke out before the ink was even dry on these so-called “Blue Eagle” codes. The mayhem was symbolized famously by the Schechter brothers’ non-complying kosher chickens.
Yet, the case of the New Jersey businessman, who was imprisoned for charging less than the prescribed 40 cents to dry clean a suit, was even more to the point. It powerfully crystallized the dangers of converting the American economy—depression or no—into a confederation of crony capitalist cartels.
The Supreme Court’s mercy killing of the NRA in May 1935, however, eliminated only part of the blight. The key labor provisions of the NRA cartel arrangements—minimum wages and hours and the right to organize monopoly unions—were resurrected in the 1935 Wagner Act and the 1938 Fair Labor Standards Act. Wrapped in the mantle of social justice, these laws openly allowed the supply and price of labor in the nation’s basic industries to be artificially restricted and inflated by monopolistic industrial unions and their captive regulatory agencies. These violations of free market rules occurred with impunity for another three decades, but only due to fortuitous circumstances.
The trade autarky of the 1930s and the supremacy of the American economy and dollar in the immediate postwar decades provided temporary cover for wages to be rigged above market clearing levels. In fact, it was hard for American labor to price itself out of a world market that didn’t exist or mattered little.
Yet it was only a temporary reprieve. Ironically, it was the other part of the May 1933 New Deal Foundation—the Thomas Amendment to the AAA—which eventually compelled a reckoning.
FDR’S CRANK MONETARY ECONOMICS:
PROFESSOR GEORGE F. WARREN’S GOLD-BUYING SCHEME
The alphabet soup of agencies were the public face of the early New Deal. At its heart, however, was FDR’s crank monetary economics. The latter was a breezy attitude, not a deeply settled conviction because FDR didn’t have any. After all, his first legislative enactment of March 14, 1933, was the Economy in Government Act championed by his pro–gold standard budget director. It resulted in a 15 percent cut in federal spending including government salaries and veterans’ pensions—an un-Keynesian imitative that historians have airbrushed out of the record.
At the same time, the actual record remains riddled with monuments to FDR’s loopy view of money. These episodes reflected his politically driven agenda of building the New Deal coalition but were positively antithetical to revival of world monetary order and trade, the sine quo non for the United States’ escape from the Great Depression.
The most egregious and instructive of these was FDR’s 1933 infatuation with one George F. Warren, professor of farm economics at Cornell. In that capacity he had written such gems as “Alfalfa” and “An Apple Orchard Survey of Orleans County.” But branching off into macroeconomics, he had also written a treatise called “Prices” which essentially argued that the United States should stage a bear raid on its own currency. By driving the gold value of the dollar down it would levitate commodity prices and with them the whole industrial economy.
Roosevelt became aware of Warren’s theories about how the magic elixir of higher gold prices could levitate recovery in agriculture and industry from his Duchess County neighbor and gentleman farmer, Henry Morgenthau Jr. The latter had studied horticultural economics under Warren at Cornell and had been brought to Washington by FDR as an aide-de-camp, but soon became secretary of the treasury by a process of default.
After Carter Glass refused the job and rail car manufacturer William Woodin died within months of taking office, the post should logically have gone to the treasury undersecretary, the brilliant and well-experienced Wall Street lawyer, Dean Acheson. Yet with the economy still floundering in the fall of 1933, Roosevelt fired Acheson for openly dissenting from his monetary flimflam.
So apparently determined to have a faithful acolyte in the Treasury post, FDR drafted his young neighbor for the job. Morgenthau’s qualification for this crucial role in the midst of the greatest depression in world history was evident to few. But at that stage of the game Morgenthau had FDR’s ear and by mid-October 1933 had maneuvered to get a regular hearing for his former professor, too.
In fact, the hearing came every morning in FDR’s White House bedroom when the three of them gathered over eggs and toast to plot the price of gold and, therefore, the macroeconomic course of the nation—at least for the day at hand. The focus of discussion was Professor Warren’s reams of tissue paper, containing charts and graphs on the prices of agricultural and industrial commodities, gold, and much else reaching back to the California gold rush, the Spanish conquest, and events even earlier.
With the aid of Jesse Jones, who was chairman of the Reconstruction Finance Corporation and had been dragooned into providing the money, the group plucked a number out of the air representing the desired gold price increase for the day. The targeted price gain was promptly sent it off to London to bid with the gold brokers.
Many years later, Morgenthau confessed that the US government’s gold bid had not been set very scientifically, to say the least. On one occasion FDR had chosen to raise the price by $0.21 per ounce, explaining, “It’s a lucky number, because it’s three times seven.”
The underlying reason for FDR’s infatu
ation with Warren’s crank doctrine was self-evident. The good professor claimed he could raise the price of wheat and other farm commodities and that’s exactly what FDR needed to quiet the unrest in his hayseed coalition of agricultural and rural areas of the South and Midwest. The latter had reached a crescendo when farm commodity prices crashed in mid-July. Wheat went down 30 percent in three days, for example, after FDR’s London conference bombshell.
At the time, sophisticated financial observers looked on with bemused disbelief. British Prime Minister Ramsay MacDonald, however, was nearly apoplectic, since FDR’s breakfast-time gold buying in the London market had the effect of driving up the pound against the dollar. Professor Keynes summed up the episode best when he called it “gold standard on the booze.”
Still, scientifically arrived at or not, Roosevelt’s gold buying did not levitate the price of wheat, industrial tallow, or anything else. The only discernible gain after several weeks of this routine was in the bank accounts of the London brokers who sold gold to the RFC each morning at a higher price than they had bought it the day before.
In due course, FDR abruptly lost interest in fixing the price of gold and went on to the scheme of another set of monetary cranks in late December 1933. This time he joined the remnants of William Jennings Bryan’s free silver campaign, promising to buy unlimited amounts of silver at double the world price.
The Silverites leader, Senator Key Pittman of Nevada, was more modest in his claims for this new commodity levitation effort. Bid up the price of silver, he advised, and the number of Democratic electoral votes in the mining states out west will also rise. On this count he was proven correct.
At the end of the day, Roosevelt had no coherent macroeconomic views or policy, other than the primitive, inflationist notion that the depression had been caused by low prices. In fact, low prices were just a symptom: the consequence of the unavoidable liquidation of the massive worldwide debt and printing-press money created during the Great War and during its aftermath in the Roaring Twenties.
Still, FDR was a pragmatist above all else. He soon discovered that none of the major initiatives of the so-called First New Deal—the NRA, AAA, Professor Warren’s gold-buying campaign, and the subsequent January 1934 revaluation of the official gold price from $20 to $35 per ounce—succeeded in raising commodity prices, purchasing power, and industrial production.
So Roosevelt moved on to a new batch of ad hocery. In abandoning the core of the original New Deal completely and unceremoniously, FDR gave proof enough that the solid rebound of nominal GDP recorded through June 1936 occurred despite the New Deal’s restrictions on farm and industrial output and its feckless monetary manipulations, not because of them.
THE MYTH OF NEW DEAL KEYNESIAN REFLATION
Foremost among the New Deal myths is the notion that FDR proved deficit spending could lift the American economy out of the depression. It was on that time-worn shibboleth that the massive deficit spending campaigns of the Bush and Obama administrations were predicated to ward off the illusory depression bogeyman in 2008–2011.
In fact, the New Deal enacted only two significant “pump-priming” programs in the classic Keynesian sense. One of these was a sheer accident—the 1936 veterans bonus payment. The other—the Works Progress Administration (WPA)—amounted to a vast patronage machine aimed at an upturn in the election cycle for the Democrats, not at countering the business cycle downturn which plagued the nation.
The accidental stimulus involved American GIs who had survived the pointless carnage in northern France. Upon their return, a grateful nation had promised them a large “bonus” pension to be paid out in the fullness of time or, more precisely, one-quarter century hence in 1942. But motivated by the widespread hardships and deprivations of the Great Depression, the veterans’ organizations had launched a determined campaign for early payment.
In early 1936 they finally succeeded in extracting from Congress a whopping bonus payout which amounted to about $300 billion in today’s dollars. The resulting fiscal stimulus must be chalked off to accident, however. The Roosevelt administration strongly opposed the payout and FDR actually vetoed the bill, but it was overridden with much Republican help.
According to a careful reconstruction of weekly treasury statements by Professor Lester G. Telser, nearly 60 percent of this massive transfer payment was distributed in a matter of six weeks in June–July of 1936, and nearly all of it went out within a year. Telser found that the three million hard-pressed veterans who received it “most likely spent all of it.” Indeed it amounted to a “rebate shock” that would have pleased even Larry Summers. The annualized run rate of treasury cash disbursements during the peak weeks was equivalent to $1.7 trillion in today’s economy, meaning that these bonus checks fueled a spectacular spending spree.
As store shelves unexpectedly emptied, orders for replacement goods surged. Soon the entire supply chain of the American economy was pulsating with inventory building, swelling production, and rising payrolls. Even the somnolent precincts of Wall Street woke up on the news that the long-rumored rebound was under way, and the stock index rose by 40 percent in less than nine months.
But then, in the spring of 1937, the US economy went radio silent. Customer traffic in the retail stores fell back to the pre-bonus normal. Consequently, restocking orders dried up, wholesale inventory building came to a screeching halt, production schedules were sharply pared, and soon unemployment was again on the rise.
This huge bonus payment had ripped through the American economy faster than green grass through a hungry goose. This wholly unplanned “stimulus” had nothing to do with New Deal fiscal policy, and instead was a spasm of election-year politics.
Still, Keynesian economists never stop gumming about the “mistake of 1937.” They insist that White House policy makers had deliberately tightened the fiscal dials too soon and caused an unnecessary second recession.
The record shows, however, that fiscal policymakers did not elect this huge, concentrated stimulus: the Congressional legislation allowed millions of veterans to cash their bonuses beginning June 15, 1936. Contrary to expectation, most of them did so all at once in a sudden, massive unplanned stampede. Self-evidently, the resulting giant economic bubble was artificial and inherently unsustainable. When it suddenly collapsed after America’s veterans finished spending their loot, the cause was not a fiscal policy mistake; it was simply the inevitable result of a poorly planned settlement of these long-standing veterans’ claims.
PWA AND WPA: STIMULANTS OF THE ELECTION CYCLE, NOT THE BUSINESS CYCLE
The other claim to Keynesian pump-priming under FDR involved two very different programs whose New Deal style acronyms—PWA and WPA—made use of the same three letters. But on the evidence, neither of these programs did much to lift the American economy out of the depression.
The first of these was the Public Works Administration, or PWA, and it was run by a skinflint lawyer named Harold Ickes. At a glacial pace that spanned FDR’s entire 13 years in office, Ickes’s PWA did build several thousand airports, courthouses, schools, hospitals, rural power plants, local highways, and bridges—even as it pinched pennies and warded off corruption every step along the way.
Ultimately, it pumped $4 billion into the economy, but the PWA was no anti-depression pile-driver. Its total investment amounted to a negligible three-tenths of 1 percent of GDP over the PWA’s long period of operation. Some of the projects which bear its plaques would have been built anyway by local governments, and others were pure white elephants like the massively expensive Grand Coulee Dam. Yet whether resulting in folly or productive public infrastructure, the smooth and glacial flow of PWA funds did not even remotely resemble counter-cyclical fiscal policy.
The Works Progress Administration was actually pro-cyclical, at least based on the even numbered years of the calendar. Very nearly the embodiment of political corruption itself, it mainly functioned as an election-time auxiliary of the Democratic Party.
F
rom a cold start upon its enactment in May 1935, its payroll soared to more than 3.0 million by Election Day 1936. Once the votes had been harvested, however, the WPA payroll swiftly plunged to 1.5 million by late 1937. From there it rocketed back to 3.5 million by November 1938, and then collapsed once again toward the one million levels in 1939. So the cycle in question was evidently not the business cycle.
In fact, the WPA was run as the personal fiefdom of the New Deal’s veritable anti-Ickes—one Harry Hopkins. His minimum low regard for the integrity of the public purse was made starkly evident when he once told FDR, “I’ve got 4 million at work but for god’s sake don’t ask me what they are doing.”
The WPA ended in scandal when it was discovered that Hopkins had run a blatant shakedown in the 1938 campaign and had required employees to contribute their meager salaries to pro–New Deal senators. Moreover, the $11 billion spent over its six year life produced comparatively meager public works—8,000 local parks, 6,000 mobile libraries, 3,000 tennis courts and 800 local landing strips. At bottom, the WPA was a wasteful form of revenue sharing with local communities which delivered a clumsy form of needs tested transfer payments to millions of unemployed farmers, workers, accountants, and musicians, etc.
Under the circumstances, these citizens had a fair claim on the public purse. But the undulations of the WPA’s hiring and firing cycle pivoted on Election Day, not the business cycle. Accordingly, the WPA did not trigger the multiplier effects of Keynesian legend.
THE MODEST 1930S RECOVERY WAS DUE TO THE REGENERATIVE POWERS OF CAPITALISM, NOT THE NEW DEAL
Once the Roosevelt banking panic was over and the Hundred Days emergency session of Congress had been completed without too much damage to the fabric of the American economy, the Hoover recovery resumed. The rebound of business inventories came first, followed by a steady recovery of consumer spending on durable goods and eventually a mild revival of fixed-asset investment.
The Great Deformation Page 23
