September 1, 2004

HOW THE FAR RIGHT PROLONGS THE NEW DEAL:

Raw Deal: A review of FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, by Jim Powell (Gregory L. Schneider, Claremont Review of Books)

Powell's main contribution is to explain how the New Deal prolonged the Depression. He points first to New Deal banking laws. The prohibition of branch-banking—the failure to allow banks to establish branches throughout the country—contributed to the banking panic and bank failures during the early 1930s. Most banks were undercapitalized institutions that should remind readers of the two-bit Bailey Building and Loan in Frank Capra's "It's A Wonderful Life." Economic rationality suggested that capital reserves be sufficient to provide depositors a guarantee that deposits would be safe. Powell argues that government regulation of banking, the New Deal's solution to the banking crisis, was unnecessary. Instead, permitting banking institutions with sufficient capital reserves to open branches and to invest their reserves would have solved the problem. Canada, which allowed branch-banking, suffered hardly any bank failures during the Depression.

Powell indicts federal monetary policy, as well. He accepts the argument, developed by economist Murray Rothbard in America's Great Depression, that the Federal Reserve system contributed to the Depression in the first place. And the Banking Act of 1935, which created the Fed's Open Market committee and further strengthened its role in shaping monetary policy, helped spark the 1938 Roosevelt recession, the third worst economic collapse in American history.

Powell's book serves also as a superb defense of the Supreme Court's famous "four horsemen of reaction," George Sutherland, Willis Van Devanter, James McReynolds, and Pierce Butler. The conservative members of the Court, famous, or infamous, for declaring unconstitutional the National Industrial Recovery Act and the Agricultural Adjustment Act, are stoutly defended by Powell. All four, joined at times by Charles Evans Hughes and Owen Roberts, "did a splendid job articulating vital principles of economic liberty—fac[ing] enormous political pressure from a popular president." Rather than being reactionaries—horse-and-buggy conservatives—the four were well-regarded practitioners of the law who served ably on the Court.

At its strongest, FDR's Folly is a powerful synthesis of the economic damage wrought by the New Deal. The book shows how New Deal farm programs helped large landowners at the expense of tenant farmers and sharecroppers; how the National Industrial Recovery Act contributed to monopoly and to the development of cartels within industries, undercutting recovery; how Social Security slowed the recovery, taxing workers, removing money from the wider economy, and contributing to higher unemployment; and how African-Americans were hurt by the Agricultural Adjustment Administration and the Wagner Act's sponsorship of unions.

Many of these arguments are well known. New Left historians in the 1960s, like Stanford University's Barton Bernstein, reached similar conclusions about the New Deal's failure, for example, to address issues of black poverty (of course, Bernstein is also critical of Roosevelt for saving capitalism). Powell does not claim that Roosevelt was a socialist. Rather, he was an opportunist, concerned with cementing his political power and little interested in how his programs affected the very constituencies he relied on for votes. For all its strengths, FDR's Folly does not come to grips with the man's political understanding and ambition. Although the New Deal failed economically, politically it was a stunning success. FDR's liberalism dominated American politics for the next four decades. Only in the '60s and '70s, when the failures of modern liberalism were apparent for all to see, did conservatives begin to make headway against the liberal establishment. But conservatives have still not proven that they can mobilize a public commitment to decreasing the size of government comparable to FDR's commitment to increasing it.


That's because they can't. Mr. Powell's--and Mr. Schneider's--failure to reckon with the popularity of the New Deal is a result of the inability of libertarians and economic conservatives to deal with the fact that their political program has been categorically rejected by the peoples of every industrialized democracy in the world. We're never going back to the 1850s. Until these folks on the far Right start thinking about how to maximize freedom within the context of a comprehensive social safety net they're just superfluous to the national debate.

Posted by Orrin Judd at September 1, 2004 1:26 PM
Comments

Try asking someone what the old deal was. You'll get a blank stare.

Posted by: M. Murcek at September 1, 2004 1:57 PM

And when, on next November fifth, I am elected chief executive of this fair land, amidst thunderous cheering and shouting and throwing of babies out the window, I shall, my fellow citizens,offer no such empty panaceas as a New Deal, or an Old Deal, or even a Re-Deal. No, my friends, the reliable old False Shuffle was good enough for my father and it's good enough for me.

--W.C.Fields, W.C.Fields for President, 1939.


I gave up on the Losertarians years ago when I realized that they had no idea how to get to their paradise in the real world. A semi-voluntary safety net is about as good as we are going to get any time soon, and I can settle for that.


Posted by: Raoul Ortega at September 1, 2004 2:07 PM

There's a problem with this thesis about small banks.

They collapsed in 1927-28, during Coolidge prosperity.

Nebraska's state deposit insurance program went broke early in 1929.

I know you are flexible about facts, Orrin, but causes precede effects. FDR didn't almost destroy the economy.

Posted by: Harry Eagar at September 1, 2004 2:19 PM

Prolonged, not caused.

Posted by: oj at September 1, 2004 2:24 PM

The inherent problem is that unfettered capitalism will inevitably result in a pyramidal social structure. Do you want our cities to look like Rio or Calcutta or Kinshasa? If socialism is defined broadly as 'any governmental intervention in the economy' then we are all socialists except for a few nuts in a trailer park near Coeur d'Alene.

Any sentient person has seen that unfettered capitalism leads to social chaos, and that Communism leads to economic and scientific sclerosis followed by social chaos. So, the dialectic pushes us back to the middle again. The only question is where that middle is located.

Posted by: Bart at September 1, 2004 2:38 PM

Bart;

It's odd that you claim those cities as the inevitable result of unfettered capitalism when every single one is in a country far more socialist than the USA. If you want a city that's the result of unfettered capitalism, British ruled Hong Kong would seem to be the best choice.

Posted by: Annoying Old Guy at September 1, 2004 2:45 PM

Self promotion warning:

I discuss issues related to this post over at my weblog.

Posted by: Annoying Old Guy at September 1, 2004 2:48 PM

Have you ever been to Hong Kong?

There is a large population of people there who live in pretty terrible conditions. Conditions far worse than any American would find acceptable.

A little review of life in the US in the late 19th century would I think also give you an idea of the kind of penury a laissez-faire system would produce.

Posted by: Bart at September 1, 2004 3:10 PM

Or a little reading of Dickens, who often set his novels amid the results of the Free Market Paradise (TM) of mid-Victorian England.

>We're never going back to the 1850s.

No matter how much incense you burn before your altar with its image of Ayn Rand.

Bush's proposal for an Ownership Society could be the best of both worlds, combining the strengths of both systems and ideas.

Posted by: Ken at September 1, 2004 3:16 PM

Harry:

The banks (and farms) took a big hit after WWI, when the Fed. raised interest rates (fearing inflation). But that was in 1919-21, not 1927-28. In Greider's book, he opens an early chapter with the history. Check it out.

Posted by: jim hamlen at September 1, 2004 3:32 PM

Libertarians are incapable of accepting a social safety net. If they did, then their entire philosophy would collapse. As ironic as it may sound, but libertarians are some of the biggest religious fundamentalists around.

Posted by: Vince at September 1, 2004 4:19 PM

Vince-- it seems anyone who devotes their life to a cause ends up being a fundamentalist, and then in most cases also seem determined to drive away anyone who is less devoted to that cause than they are.

Posted by: Raoul Ortega at September 1, 2004 4:32 PM

In so far as I can tell, anything unfettered leads to disaster. (Even, or perhaps especially, good intentions.)

Posted by: Uncle Bill at September 1, 2004 4:40 PM

Exactly Raoul. Libertarianism is an extremist philosophy, and extremist philosophies can only work unless everyone is on board, but in real life there will always be some kind of dissent. Economic moderates/liberals and social moderates/conservatives will always dissent from the libertarian philosophy, which is why libertarianism will never become a reality.

Posted by: Vince at September 1, 2004 4:49 PM

The comments on libertarianism sound like pro-choicers talking about pro-lifers.

Posted by: Joseph Hertzlinger at September 1, 2004 5:26 PM

AOG:

I added your wegblog to my favorites list.

Excellent use of irony, BTW.

Posted by: Jeff Guinn at September 1, 2004 10:07 PM

The banks didn't fail in 1921, jim, although you're right that they took a hit.

The farms started failing then, though, and not so much because of interest rates but overproduction (fallout of war production) that a free market was incapable and a Republican government was uninterested in dealing with.

It took a while to bring the most vibrant economy in the history of the world crashing down, but Coolidge managed without, literally, lifting a finger.

That it was difficult to unstir the pudding should surprise no one, but Orrin hasn't gotten to the point of even admitting the farm economy (and its banks) was trashed by the Republicans.

You're that much ahead of him.

Posted by: Harry Eagar at September 1, 2004 10:24 PM

Harry:

But wouldn't the shift away from a 'farm' economy, which probably began in earnest after TR was elected, be at its most painful when the manufacturing sector began to explode (i.e., in the 20s)?

And weren't farm communities hit worse from 32-36 than in the 20s? I don't really know, but it seems that if the Republicans were that irresponsible during the 20s, Coolidge would not have been re-elected. And what happened in 1929 had very little to do with agriculture.

Posted by: jim hamlen at September 1, 2004 10:32 PM

Harry:

Better go talk to your economist. The statement that "The farms started failing then, though, and not so much because of interest rates but overproduction (fallout of war production) that a free market was incapable and a Republican government was uninterested in dealing with." is completely self-contradictory. Failure is the market dealing with it.

Posted by: oj at September 1, 2004 11:32 PM

Bart;

Yes, actually, I have been to British ruled Hong Kong. I'm not clear on what difference that makes.

I am also aware of conditions in the 19th century USA, although sadly I have been unable to visit there. Have you?

But I suppose your point is that the USA of the 19th century was so horrible that millions fled rather than suffer its appalling conditions. Only the massive forced relocations of Europeans to the central plains and major east coast cities kept the country populated.

As for Hong Kong, it's not clear to me that conditions there are any worse than some inner cities in the USA. Or perhaps you might visit Appalachia. The idea that we wouldn't tolerate that kind of poverty in the USA seems untenable.

You appear to believe that proponents of unfettered capitalism believe that it will produce a utopia. Nope. It's not even a panacea. There will still be poor people, they just won't be as poor as their equivalents in other economic systems.

Moreover, as Mr. Judd would point out, money isn't everything. A society may well choose to sacrifice maximal economic growth for other values and fetter its capitalism. But the idea that unfettered capitalism will naturally produce oppressive material poverity is simply not plausible.

Mr. Guinn;

Thanks.

Posted by: Annoying Old Guy at September 2, 2004 12:21 AM

Positing that 1850s America was a Libertarian failure is ridiculous - as well as a leap in logic. Slavery, monopolies, corruption, coercion of women/children (anybody really), to name a few quickly preclude it from being Libertarian. Though government had not yet obtained its current predatory glory, many other institutions were there in its place fulfilling the role. Put another way, there was no opportunity, now where have you recently heard that?

It amazes me how threatened by Libertarianism conservatives are. Because John Locke believed in God, Libertarianism is in valid? I think not. I guess the concept of neutrality so threatens Christians they must resort to name calling (losertarians, extremist, fringe, etc). Just because they are able to make that leap of faith we all must? No way again. My philosophy can accommodate yours, but yours cannot mine, and Im the loser? Laughable.

At least you guys have obtained awareness, the left is still clueless!! They think they go to work in Government jobs and do something meaningful, teach kids, regulate, social work, judicator, etcLittle do they know I would lay off about 20 out of the 28 million State and federal workers. (As a start). The IRS would be first. I guess it is extreme if you are out of your cushy gov job and out of your cushy gov pension, you know the one the rest of us dont have.

Not practical OJ and others say? Try this:

Lay off the left, like I describe above. This gives you economic conservatism in society
Now make the God lovers be neutral, this gives you social liberalism. (Example, repeal all marriage laws, therefore gays cant complain about not being treated the same). I know it would be hard for the right to have a gov neutral on topics such as abortion, but remember, it is hard for the Islamic nuts not to want to take the world back to the 7th century

Posted by: Perry at September 2, 2004 12:56 AM

Perry:

That's your practical solution? That we be amoral?

Posted by: oj at September 2, 2004 1:08 AM

OJ,

No, you can be moral all you like, and so can everyone else, and so will I, but our government won't reflect any off it.

Posted by: Perry at September 2, 2004 1:12 AM

Great. My morality requires that you be moral toon and I choose to have government enforce that. You can, of course, oppose that, but then you're trampling my freedom to choose and imposing your own moral vision on the rest of us.

Posted by: oj at September 2, 2004 1:17 AM

??

What am I imposing on you? I say you are doing the imposing. From a personal standpoint, I say do whatever you want as long as you don't hurt somebody, etc...rest of libertarian spiel here.

I believe your saying quite the opposite, as you would have a long list of things I can't do as it offends your moral sensiblities.

Posted by: Perry at September 2, 2004 1:22 AM

Precisely. Sic transit libertarianism.

Posted by: oj at September 2, 2004 1:26 AM

I said earlier that libertarians are some of the biggest religious fundamentalists around, and I guess Perry's own judgementalism proves it.

Posted by: Vince at September 2, 2004 3:05 AM

AOG,

There are literally hundreds of thousands of Hong Kong people living without running water, basic sanitation, etc, a significant percentage of the population. Are they living better than in the PRC? Of course, but that's a pretty low standard. By contrast in the US, the leading causes of death for poor people are connected with obesity.

You are sadly guilty of all-or-nothing thinking as well as historical ignorance. Two major groups of immigrants to the US were forced out of their homes by their respective governments, the Catholics of Ireland, who were subjected to Stalin-style planned famines, and the Jews of Tsarist Russia, where the Minister of the Interior's stated policy towards them from the 1890s to the fall of the Tsar was '1/3 convert, 1/3 emigrate and 1/3 starve to death.' Jewish emigration to the US was nearly stopped in the interwar period, otherwise millions of other Jews would have come here fleeing the viciously racist governments of Eastern and Central Europe, in places like Hungary, Poland and Romania.

The criminal nature of feudal regimes effectively forced out millions of others. Things were so bad in Southern Italy, the Mafia was created by peasants who were simply tired of government extortion, it was a form of brigandage as popular rebellion, hence the reality that when one refers to the Mafia in Italy, the preferred term of reference is 'The Friends.' Vittorio Orlando, one of the Versailles signatories, campaigned in Sicily as 'the friend of the Friends' and ended up on the same stage as Wilson, Lloyd George and Clemenceau.

That socialism is a failure doesn't make unfettered capitalism a success. The reality is that whenever any form of liberalization has resulted in unacceptable levels of inequality, demagogues arise to exploit that anger for nefarious ends. All one needs do is look at Latin America. Virtually every Latin dictator has gotten his start as a 'man of the people.' Peron, Chavez, Vargas, Velasco, Torrijos, Noriega, Arbenz, Batista, Castro, Trujillo. The list is endless but the song remains the same. Capitalist systems are far better at producing and distributing wealth than other systems are. However, they have imperfections and those must be softened, or else the seeds of their own demise sprout. Peruvians are so upset right now with their neo-liberal President, that the leader in the polls is Alan Garcia(a Socialist who had a disastrous stint as President in the 80s that ended with two Marxist insurrections and him going to the hoosegow on corruption charges), which is like NYC electing John Lindsay today.

One further hint. Don't ever discuss economics and say that money isn't everything. It is like shooting yourself in the foot. In economics, money is everything.

Posted by: Bart at September 2, 2004 6:52 AM

That's why you don't want markets in control, Orrin.

The results are so bad.

Jim, the farmers were wiped out by the markets in the '20s, although, as Rexford Guy Tugwell and the Columbia economists demonstrated, the markets could have been manipulated to reduce production without destroying 30 million people.

That the farmers were worse off in 1935, setting aside public assistance, is hardly surprising, given the low state Coolidge prosperity had brought them to earlier.

Most farmers in my area were better off in '35 than in '25.

The Coolidge won election so easily was due to the strategy of enriching 60% of the country at the expense of impoverishing 40%. It's a guarantee of success in an electoral democracy, as Margaret Thatcher demostrated; but it does not have staying power.

The sad fact is that the Depression lasted longer and went deeper under the Republicans than it was under Roosevelt.

Posted by: Harry Eagar at September 4, 2004 3:43 PM

Harry:

That's ahistorical.

Try David Kennedy's entry in the Oxford History of America. A good standard liberal text that makes it crystal clear the New Deal failed and only the war got the economy going again..

Posted by: oj at September 4, 2004 5:43 PM
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