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How FDR Made the Depression Worse
February 1, 1995
By Robert Higgs

Franklin Roosevelt “did bring us out of the Depression,” Newt Gingrich told a group of Republicans after the recent election, and that makes FDR “the greatest figure of the 20th century.” As political rhetoric, the statement is likely to come from someone who does not support a market economy. The New Deal, after all, was the largest peacetime expansion of federal government power in this century. Moreover, Gingrich’s view that FDR saved us from the Depression is indefensible; Roosevelt’s policies prolonged and deepened it.

There’s no doubt that Roosevelt changed the character of the American government—for the worse. Many of the reforms of the 1930s remain embedded in policy today: acreage allotments, price supports and marketing controls in agriculture, extensive regulation of private securities, federal intrusion into union-management relations, government lending and insurance activities, the minimum wage, national unemployment insurance, Social Security and welfare payments, production and sale of electrical power by the federal government, fiat money—the list goes on.

Roosevelt’s revolution began with his inaugural address, which left no doubt about his intentions to seize the moment and harness it to his purposes. Best remembered for its patently false line that “the only thing we have to fear is fear itself,” it also called for extraordinary emergency governmental powers.

The day after FDR took the oath of office, he issued a proclamation calling Congress into a special session. Before it met, he proclaimed a national banking holiday—an action he had refused to endorse when Hoover suggested it three days earlier.

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that “all banking transactions shall be suspended.” Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public’s sense of crisis and allowed him to ignore traditional restraints on the power of the central government.

In their understanding of the Depression, Roosevelt and his economic advisors had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it’s hard to believe anyone seriously believed it would work.

The goofiest application of the theory had to do with the price of gold. Starting with the bank holiday and proceeding through a massive gold-buying program, Roosevelt abandoned the gold standard, the bedrock restraint on inflation and government growth. He nationalized the monetary gold stock, forbade the private ownership of gold (except for jewelry, scientific or industrial uses, and foreign payments), and nullified all contractual promises—whether public or private, past or future—to pay in gold.

Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69 percent increase, but the domestic price level increased only seven percent between 1933 and 1934, and over the rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, further strangling international trade and throwing the world’s economies further into depression.

Having hobbled the banking system and destroyed the gold standard, he turned next to agriculture. Working with the politically influential Farm Bureau and the Bernard Baruch gang, Roosevelt pushed through the Agricultural Adjustment Act of 1933. It provided for acreage and production controls, restrictive marketing agreements, and regulatory licensing of processors and dealers “to eliminate unfair practices and charges.” It authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production.

The objective was to raise farm commodity prices until they reached a much higher “parity” level. The millions who could hardly feed and clothe their families can be forgiven for questioning the nobility of a program designed to make food and fiber more expensive. Though this was called an “emergency” measure, no president since has seen fit to declare the emergency over.

Industry was virtually nationalized under Roosevelt’s National Industrial Recovery Act of 1933. Like most New Deal legislation, this resulted from a compromise of special interests: businessmen seeking higher prices and barriers to competition, labor unionists seeking governmental sponsorship and protection, social workers wanting to control working conditions and forbid child labor, and the proponents of massive spending on public works.

The legislation allowed the President to license businesses or control imports to achieve the vaguely identified objectives of the act. Every industry had to have a code of fair competition. The codes contained provisions setting minimum wages, maximum hours, and “decent” working conditions. The policy rested on the dubious notion that what the country needed most was cartelized business, higher prices, less work, and steep labor costs.

To administer the act, Roosevelt established the National Recovery Administration and named General Hugh Johnson, a crony of Baruch’s and a former draft administrator, as head. Johnson adopted the famous Blue Eagle emblem and forced businesses to display it and abide by NRA codes. There were parades, billboards, posters, buttons, and radio ads, all designed to silence those who questioned the policy. Not since the First World War had there been anything like the outpouring of hoopla and coercion. Cutting prices became “chiseling” and the equivalent of treason. The policy was enforced by a vast system of agents and informers.

Eventually the NRA approved 557 basic and 189 supplementary codes, covering about 95 percent of all industrial employees. Big businessmen dominated the writing and implementing of the documents. They generally aimed to suppress competition. Figuring prominently in this effort were minimum prices, open price schedules, standardization of products and services, and advance notice of intent to change prices. Having gained the government’s commitment to stifling competition, the tycoons looked forward to profitable repose.

But the initial enthusiasm evaporated when the NRA did not deliver, and for obvious reasons. Even its corporate boosters began to object to the regimentation it required. By the time the Supreme Court invalidated the whole undertaking in early 1935, most of its former supporters had lost their taste for it.

Striking down the NRA, Chief Justice Charles Evans Hughes wrote that “extraordinary conditions do not create or enlarge constitutional power.” Congress “cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed.”

Despite the decision, the NRA-approach did not disappear completely. Its economic logic reappeared in the National Labor Relations Act of 1935, reinstating union privileges, and the Fair Labor Standards Act of 1938, stipulating regulations for wages and working hours. The Bituminous Coal Act of 1937 reinstated an NRA-type code for the coal industry, including price-fixing. The Works Progress Administration made the government the employer of last resort. Using the Connally Act of 1935, Roosevelt cartelized the oil industry. Eventually, of course, the Supreme Court came around to Roosevelt’s way of thinking.

Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state sector drained the private sector, controlling it in alarming detail, the economy continued to wallow in depression. The combined impact of Herbert Hoover’s and Roosevelt’s interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.

Even more tragic is the lasting legacy of Roosevelt. The commitment of both masses and elites to individualism, free markets, and limited government suffered a blow in the 1930s from which it has yet to recover fully. The theory of the mixed economy is still the dominant ideology backing government policy. In place of old beliefs about liberty, we have greater toleration of, and even positive demand for, collectivist schemes that promise social security, protection from the rigors of market competition, and something for nothing.

“You can never study Franklin Delano Roosevelt too much,” Gingrich says. But if we study FDR with admiration, the lesson we take away is this: government is an immensely useful means for achieving one’s private aspirations, and resorting to this reservoir of potentially appropriable benefits is perfectly legitimate. One thing we have to fear is politicians who believe this.
Reprinted with permission from the March 1995 issue of The Free Market, published by the Ludwig von Mises Institute. © Copyright 1995, Ludwig von Mises Institute, 518 W. Magnolia Avenue, Auburn, AL 36832-4528.
Robert Higgs is Retired Senior Fellow in Political Economy, Founding Editor and former Editor at Large of The Independent Review.

TimTuolomne 9 Apr 14
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Yes, he and his party fooled most of the people most of the time. This article only brushed the surface of what he did, it was far worse I'm afraid, which laid the ground work for what we face today.

1

Excellent article! Always some interesting reading at the Mises site. It seems political asses become national heroes. Barack Obama is heading for iconic status in the history books but they will probably be tearing down his statues in 100 years.

FDR was President in the era of governmental socialist experimentation, national socialism in Germany, fascism/socialism in Italy, Communism/socialism in Russia and China. Socialism didn't succeed in America at that time, the Constitution did provide some restraint but we never heeded the lessons we should have learned or defined what socialism actually is in all its manifestations. It still weasels its way into national sovereign governments making steady gains towards its goal of a global government.

Gingrich is for limiting government and individual responsibility and makes some good political points in that respect but he has little grounding when it comes to economics and the free market.

In 1937, FDR illegally threatened all nine Supreme Court Justices with removal if they failed to abandon the Commerce Clause of the Constitution. In 1942 they did in Wickard v Filburn, which became popularly known as the "Stitch in time that saved nine." That decision was the slippery slope onto which the US stepped, in which the government could tell farmers what they could and could not grow - practically the envy of Soviet Central Planning.

That was an incredibly destructive fracture of Constitutional principles, and is responsible for the vast unConstitutional Federal unaccountable bureaucracy we have today, including leading to unConstitutional Obamacare.

If the Commerce Clause were reinstated, and everything downstream invalidated - including repeal of the LRRA and the Bay-Dole Act, most of the Federal bureaucracies would cease to exist, farmers might recover their farms from industrial corporations, competitive insurance rates could drop to a tenth of what they are today, and the quality of medicine could recover as well. Those and more are the consequences of crippling the Constitution by FDR and those eagerly following in his footsteps to destroy the Constitution - the only document in history to assert the inherent rights of the people, and written for the defense of those rights.

I once thought Gingrich a smart guy. No longer. He is apparently unacquainted with the superlative value of our Constitution.

@TimTuolomne

Yes. I agree, FDR is mostly responsible for where the US is today politically. He opened the door to a Marxist communist/socialist takeover. Woodrow Wilson had similar objectives but worked more to empower bankers that conned him into creating the Federal Reserve; not that he wasn't an eager supporter of this centralization of power.

FDR created his own Five year plan not dissimilar to Stalin's.

FDR suffered much deserved criticism from the Republican side of the aisle and some journalists like H.L. Melcken. Time magazine made Hitler the Man of the year in 1938.

@FrankZeleniuk Consider this: The US Treasury has to keep its physical assets somewhere. There are only two choices: A private bank or a government bank. Are you of the belief that a government bank, run by government employees, influenced heavily by Congress and other bureaucracies, might somehow be less prone to corruption and criminal manipulation than a private institution?

In the Federalist papers, Hamilton and Madison debated that question and they came to the conclusion that the private bank had the advantage of better accountability. What do you think?

@TimTuolomne Private is more preferable to the other in my view but the real destructive element of banking is fractional reserve banking and the power of the public bank to control the creation of currencies. The paper currency the federal reserve initially printed has gone from being just a legal tender to the money itself. The ability to manufacture money opens the door to create debt and serve every emergency, real manufactured or imagined. I do not believe any man can resist the temptation to meet all the demands for money, that may arise, including skullduggery. Some of the needs are simply greed and lust for power. The other danger, besides the frailty of the human element to serve the needs of the public, is a public bank that creates a nation's money can never fail or it would be the end of the nation it serves. The federal reserve should have failed already but it just goes further into debt.

@FrankZeleniuk Wouldn't you say the processes you have described of the Federal Reserve Bank have been created by Congress?

In my view, Congress has been manipulating the currency increasingly without regard for the free market, and the people have been asleep to it.

In my view the evil is not the Federal Reserve, it is the people who in the majority have taken the position that they do not want to be bothered about any of that, and desperately want to just trust their reps to do the right thing, in spite of every evidence that they will not.

Nothing will change until the voters start maturing, take responsibility for what is happening in our Representative Republic, and start electing representatives who defend the Constitution.

The Constitution asserts our inalienable rights, and that the government may not infringe them. That limits government, which is inconvenient for those who have no interest in preserving the Constitution, because it limits their pursuit of power - one of the things NOT guaranteed under the Constitution. Republicans were founded to defend the Constitution. Democrats were not, and from their founding have been the party of slander of Republicans, deception and fraud.

"You have a Republic, if you can keep it." - Ben Franklin.

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