Toward The Great Cleansing
Chapter 1 (Part 3 of 4) of the book
The Discovery of First Principles, Volume 3
Edward J. Dodson
Social Democracy and the Mixed Economy
When the U.S. stock market crashed in October 1929 the one person in
a position to intervene was the first-term Governor of the State of
New York, Franklin Delano Roosevelt. He had been in office since
January, embarking on a moderate program that included prison reform
and establishment of old age pensions. In August he also declared his
support for a government-controlled system of unemployment insurance.
He also championed the right of workers to organize for collective
bargaining. He opposed providing government guarantees to depositors
in banks or the imposition of heavy regulation on the banks.
Regulation of the utilities -- industries Roosevelt thought were
inherently monopolistic -- became an important exception in his vision
of the mixed economy. Aristocratic, wealthy, highly educated,
patrician, groomed for public service but without a strong ideological
vision, Roosevelt practiced compromise and conciliation in order to
get things accomplished. He held great faith in the underlying
strength of the republic and in the spirit of the people of the United
States. Roosevelt biographer Ted Morgan writes of him:
There were no isolated events for Roosevelt. Everything
that happened in the state and the nation, every crisis, every
decision taken, was part of a larger context of America fulfilling
its destiny, of an experiment in government still being worked
out.[67]
That experiment was now subjected to the pressures of spreading bank
failures, rising unemployment, business and personal bankruptcies and
social unrest. The question facing Roosevelt and other high public
officials was in what ways government ought to provide relief and
intervene to stimulate economic activity.
By the middle of 1930, and despite worrisome signs in the rural
heartland, Herbert Hoover was publicly declaring the depression had
come to an end. Expressions of public optimism were in line with
Hoover's perceived duty to provide psychological nourishment in lieu
of real help from government. Despite his public utterances, however,
Hoover was no fool; he understood full well that the disappearance of
income (and purchasing power) for millions of citizens meant that
businesses were not going to expand production unless and until the
demand for goods showed signs of increasing. Unfortunately, just the
opposite occurred. That winter unemployment reached one quarter of the
work force. Antagonism toward Hoover and the Republican party opened
the door for the Democratic party, as much out of mass desperation as
from any confidence that the Democrats would actually do much to
improve conditions. Among the Democrats, Franklin Roosevelt was far
and away the one public official who aggressively attempted to use the
powers of state government to mitigate the impact of the depression.
At the same time, Roosevelt began to publicly express his own views on
important socio-political questions. Speaking to the state legislature
in 1931, he asked rhetorically, "What is the state?":
It is the duly constituted representation of an organized
society of human beings, created by them for their mutual protection
and well-being. 'The State' or 'the Government' is but the machinery
through which such mutual aid and protection are achieved. ...In
broad terms, I assert that modern society, acting through its
government, owes the definite obligation to prevent the starvation
or the dire want of any of its fellow men and women who try to
maintain themselves but cannot.[68]
This was sentiment as much as penetrating socio-philosophical
thought, but his words suggested that individuals living together
within a societal framework had a responsibility to care for one
another. What was heartening to many and troublesome to those who had
long enjoyed great privilege was the fact that Roosevelt seemed to
have broad appeal across the nation. As chief executive for the State
of New York, he demonstrated a determination to deal with problems and
issues that surprised all but those closest to him. Democratic party
stalwarts in other states took notice, as did the millions of citizens
suffering under the weight of the Depression.
Roosevelt pushed for and got a large increase in the state income
tax, which was the most direct way he knew of to achieve a meaningful
redistribution of purchasing power. He brought in Harry Hopkins to
head the state's Temporary Emergency Relief Administration. Advice
came from many directions, including Felix Frankfurter; and, once he
declared for the Presidency, Roosevelt openly sought input from a
group of academicians led by Columbia University political science
professor Raymond Moley.[69] This small group of advisers became known
as Roosevelt's "brain trust." Moley recruited two
economics professors from Columbia to develop policy. Rexford Tugwell
provided expertise on agriculture, and Adolf A. Berle, Jr. dealt with
monetary policy. Remarkably, neither Tugwell nor Berle were Roosevelt
supporters, but they welcomed the opportunity to advise the Governor.
Both Tugwell and Berle had become strong proponents of central
planning and regulated markets.
Roosevelt now had a reasonably cohesive plan with which to attack the
Depression. All that remained was to gain his party's nomination and
take the Presidency away from Hoover. The Democrats rather quickly
united behind Roosevelt, who accepted the nomination with a promise of
a New Deal for the citizens of the nation. Hoover then
blundered by calling out the military against the so-called bonus
army of war veterans encamped along the Anacostia River in
Maryland. The image of General Douglas MacArthur's tanks and cavalry
attacking unarmed men who had earlier in their lives served their
government in Europe was a national disgrace Hoover could not easily
rationalize to a nation of unemployed and hungry people. All through
the summer months Roosevelt planned his campaign and in September set
off on a journey across the country. The President-in-making observed
in the United States an unexpected depth of apathy. Despite the
suffering, those who called for a Bolshevik or Fascist-style takeover
attracted few supporters. Among those searching for new ideas, social
democracy and the mixed economy, central planning and coordination of
wealth production seemed like sensible responses to an economic system
shown to be incapable of self-regulation. As they pondered such
choices, John Maynard Keynes (in the pages of The Atlantic)
raised the stakes. While most of his colleagues patiently waited for
the markets to find a new equilibrium, Keynes challenged them to
respond to the global crisis: "Can we prevent an almost
complete collapse of the financial structure of modern capitalism?"[70]
asked Keynes. If Keynes had been an eccentric or some obscure college
professor, he could have been ignored. Trouble was, he was raising
questions few other economists wanted to be raised. In the face of the
real world problems staring at them, they had few recommendations to
make.
Keynes, on the other hand, pointed out the obvious and explained that
the behavior of individuals, individual businesses and even individual
governments all seemed appropriate and beneficial in isolation.
Unfortunately, taken in the aggregate there was a tremendous "disharmony
of general and particular interest."[71] The nations of the
world were locked in an embrace from which there was no escape, he
warned. The time had come for the leaders of individual nations to
begin to work together for the common good:
Each nation, in an effort to improve its relative
position, takes measures injurious to the absolute prosperity of its
neighbors; and, since its example is not confined to itself, it
suffers more from similar action by its neighbors than it gains by
such action itself. Practically all the remedies popularly advocated
to-day are of this internecine character. Competitive wage
reductions, competitive tariffs, competitive liquidation of foreign
assets, competitive currency deflations, competitive economy
campaigns -- all are of this beggar-my-neighbor description. ...
...[T]hrough lack of foresight and constructive imagination the
financial and political authorities of the world have lacked the
courage or the conviction at each stage of the decline to apply the
available remedies in sufficiently drastic doses; and by now they
have allowed the collapse to reach a point where the whole system
may have lost its resiliency and its capacity for a rebound.[72]
There was no time to lose. Keynes urged the French to reach a final
settlement on reparations with the Germans. He applauded Britain's
departure from the unworkable gold exchange system as a positive step
in halting global deflation. He predicted that France, and eventually
the United States, would suffer the consequences of maintaining a
fixed exchange rate for the franc and the dollar against sterling and
other currencies no longer tied to gold. And, finally, he urged
governments to use their spending powers to stimulate production and
consumption. Yet, he was not optimistic that the measures he viewed as
nothing more than common sense would be taken. "In the United
States," he closed, "it is almost inconceivable what
rubbish a public man has to utter to-day if he is to keep respectable."[73]
For rather different reasons, Harry Gunnison Brown largely agreed
with the assessment Keynes offered of the political decision-making
process. In the Spring of 1933, an article by Brown appeared in the
Beta Gamma Sigma Exchange attacking most of the proposals then
being made as integral to a recovery and (agreeing with Keynes)
suggested that the time had come to abandon the gold exchange system,
writing: "L[I]t would be better to stabilize the general
price level by open market purchases and sales of eligible securities
as well as gold and not be dependent upon any need to interfere with
the importation and exportation of gold."[74] Today, gold is
freely bought and sold just as any other commodity. Currencies find
their exchange rates based on market forces and how markets react to
government and central bank actions. A certain degree of monetary
instability is inherent in a system dependent upon the exchange of
numerous currencies. However, I would argue that the degree of
instability would be infinitely less if paper currency represented a
claim on a specific basket of goods. Readers will recall the period
during which the Bank of Amsterdam served as a bank of deposit and as
an issuer of coinage trusted to contain a standard ratio of gold and
silver. There was virtually no possibility during the early years of
the global depression of creating a single currency attached to a
system of deposit banks. Each government was, as Keynes wrote,
concerned only with its own survival.
In the United States, at least, there was to be new leadership and a
push for experimentation. Franklin D. Roosevelt had been elected by a
margin of over 7 million votes -- an extraordinary mandate to do
whatever was reasonably necessary to restore vitality to the republic.
Roosevelt demonstrated he was prepared to make decisions on the run.
He picked up from where Hoover left off and helped to move the nation
along a path the end of which brought the two main national political
parties rather closer together. The formation of majority coalitions
frequently crossing party lines to advance or thwart particular
legislation established the outward boundaries of Roosevelt
liberalism. Too much movement in the direction of regulation and
central planning was opposed by proponents of the existing order. At
the same time, the continued protection of so many forms of privilege
and weak enforcement of laws against criminal license prevented
movement toward a truly just society. Justice could not prevail when
behavior outside the realm of liberty were encouraged, on the one
hand, while those legitimately within the realm of liberty were
simultaneously thwarted. What the New Deal succeeded in doing was to
check the advance of more radical ideas in favor of incremental
changes to the status quo. Under the circumstances, those who
controlled most of the nation's wealth had much about which to feel
comforted. With so much at stake, Roosevelt's first inaugural address
was surprisingly brief, remembered primarily for his bold assertion: "
the
only thing we have to fear is fear itself -- nameless, unreasoning,
unjustified terror which paralyzes needed efforts to convert retreat
into advance."[75] The message delivered, Roosevelt and his
New Dealers went to work.
With the help of Raymond Moley, Roosevelt began to build his
administration from the top down. His key cabinet appointments
included the Iowan Henry Wallace (Agriculture), Tennessee Senator
Cordell Hull (State), Frances Perkins (Labor), industrialist William
H. Woodin (Treasury), Harold Ickes (Interior) and the trust-busting
progressive, Senator Thomas J. Walsh (Attorney-General). Roosevelt
brought his cabinet members together the day after the inauguration
and got them off to a running start. First on the President's list of
priorities was to take action in response to the collapse of the
banking system. Nearly 2,300 banks had failed in 1931, and another
1,400 failed banks were added to the list during 1932. Government
loans slowed the closings, and a number of state and municipal
governments declared bank holidays or restricted withdrawals. A major
problem for the banks was the inability to raise cash by the sale of
corporate bonds they held as assets without taking significant losses.
Moreover, increasing numbers of loans made to real estate developers
defaulted. Most of the properties acquired by foreclosure were then
resold by the banks at half their acquisition and construction cost
(or less). All across the nation millions of homeowners were no longer
making payments on mortgage loans. Large numbers of businesses were in
about the same financial condition. Depositors withdrew their cash
from any bank even suspected of weakness and either transferred their
accounts to other banks or withdrew the currency from circulation. On
the eve of Roosevelt's inauguration, the Federal Reserve Board was
urging Hoover to declare a national banking holiday. Hoover sought
Roosevelt's agreement before acting but could get no reply and so did
nothing. Instead, the state governors of New York, New Jersey,
Pennsylvania, Massachusetts and Illinois took action to close the
banks, and virtually every other state followed. Upon taking office,
Roosevelt filled the vacuum at the Federal level by declaring a
three-day holiday beginning March 6. At the same time, he took the
United States off the gold exchange standard. Keynes, Harry Gunnison
Brown and their colleagues then waited to see what more Roosevelt
agreed had to be done.
Roosevelt was ready to put his mandate -- and the Democratic party's
majority in the Congress -- to the test. The Republicans knew that the
era of laissez-faire was ending and, for a time, rallied to
the cause of national unity. Roosevelt had certainly benefited by his
association with the academics pulled together by Raymond Moley.
Still, there was in the New Deal no cohesive plan. Moley would
later recall that what emerged was "a loose collection of
many ideas -- some new, most borrowed from the past -- with plenty of
improvisations and compromises."[76] Ted Morgan adds that "the
first law of the New Deal" was "the Law of
Unintended Consequences."[77] The attack proceeded along a
broad front. The banking crisis had to be dealt with immediately, and
the approach taken shifted the impetus for legislation from the
Congress to the Executive. A new law was quickly prepared and passed
prohibiting the exporting of gold and requiring private holders to
sell their gold to the Federal Reserve Banks at a fixed price of
$20.67 an ounce. Holders of U.S. currency were left with few choices.
They could continue to hold currency without interest, redeposit these
reserves back with the surviving banks or invest in corporate stocks
and bonds the values of which were still falling.
For reasons that were as much psychological as pragmatic, Roosevelt
introduced an across-the-board reduction in the salaries of Federal
employees. Then, in the face of strong objections raised by General
Douglas MacArthur, military expenditures were cut by more than $200
million. A new Civilian Conservation Corp. almost immediately began to
put people to work on public lands. The wealthier farmers and
agribusinesses in general received a considerable measure of Federal
subsidy in May with the passage of the Agricultural Adjustment Act,
which introduced the practice of paying farmers to leave acreage idle
to prevent overproduction. Next came the Federal Emergency
Relief Administration and the Tennessee Valley Authority. A new
Federal Deposit Insurance Corporation was created under the
Glass-Steagall Banking Act, which also prohibited commercial banks
from engaging in the financing of stock purchases. The Wagner Act
guaranteed the rights of workers to organize for purposes of
collective bargaining. Although the detailed record of meetings and
decisions reached during these first months verifies Raymond Moley's
assessment, there is also a strong case to be made for Frank Freidel's
conclusion that "[t]he New Deal ... completely abandoned the
laissez-faire tradition" [and] "attempted to manage the
business cycle."[78] Certainly, Roosevelt's initiatives
created a window of opportunity for Adolf Berle, Rexford Tugwell and
others to advance the case for more direct central planning.
Somehow during this first year, the President found time to put
together his own account of this flurry of activity, published in 1934
under the title On Our Way. He had come to realize that the
end of laissez-faire had been long overdue:
The almost complete collapse of the American economic
system that marked the beginning of my administration called for the
tearing down of many unsound structures, the adoption of new methods
and a rebuilding from the bottom up.
Three steps, all interrelated, were necessary: first, by drastic
measures to eliminate special privilege in the control of the old
economic and social structure by a numerically very small but very
powerful group of individuals so set in authority that they
dominated business and banking and government itself; second, to war
on crime and graft and to build up moral values; and third, to seek
a return of the swing of the pendulum, which for three generations
had been sweeping toward a constantly increasing concentration of
wealth in fewer and fewer hands -- a swing back in the direction of
a wider distribution of wealth and property of the nation.[79]
Raymond Moley was no stranger to the writings of Henry George or to
the potential for the adoption of George's proposals to stimulate the
results Roosevelt stated he wanted to achieve.[80] Yet, Moley
describes his own knowledge of economic matters as rudimentary, so
much so that he was reluctant to advise the President on matters
better left to Berle and Tugwell. When Roosevelt wrote, "[t]he
time called for and still calls for planning," he seemed to
be giving the proposals of these two economists broad support. What is
perhaps fair to say is that Berle and Tugwell reinforced Roosevelt's
own sense of what had to be done, which was to get income flowing into
the hands of consumers so that demand (and production) would begin to
create a counter-cyclical movement. The question was how to accomplish
this objective. Even had Moley advanced ideas learned from Henry
George, the political obstacles for their adoption would have been
enormous. There is no evidence I have been able to locate that Moley
made such an attempt.
Tariffs and other restrictions on trade deepened and prolonged the
Depression. Across the Atlantic, British voters abandoned Labour in
favor of the Conservatives and abandoned free trade in a desperate
attempt to protect a dwindling employment base. A third of Germany's
work force was idle, and after a succession of governments came and
went Adolf Hitler was reluctantly called upon by the aged President,
Paul von Hindenburg, to take over the job of Chancellor. Not long
thereafter, Germany broke off disarmament negotiations and withdrew
from the League of Nations. In France, power changed hands frequently
as successive governments proved incapable of effective leadership.
Mussolini was firmly entrenched in Italy and was set to embark on an
imperialistic invasion of Ethiopia in 1935. On the Pacific rim, land
hunger and economic hardship had combined to thrust the Japanese into
the imperialist arena at the expense of the people living in
Manchuria. Participatory government and transnational values were
almost everywhere in retreat. Paul Johnson observes that by
mid-decade, "many intelligent people believed that fascism
was likely to become the predominant system of government in Europe
and perhaps throughout the world." They had good reason, as
Johnson describes:
There were quasi-fascist regimes in Germany, Italy,
Spain, Portugal, Poland, Hungary, Austria, Turkey, Greece, Romania,
Japan and many others states; and flourishing fascist parties
virtually everywhere else.[83]
Representatives from these fascist states and the social democracies
came together in 1932 to discuss disarmament, but it soon became clear
to even the most ardent pacifists that the major nations were headed
toward conflagration. Albert Einstein, brought by the transnationals
to Geneva in a desperate attempt to stimulate a united transnational
reaction to the war fever, sensed that time was running out. "One
does not make wars less likely to occur by formulating rules of
warfare," Einstein lamented. "One must start with
the unqualified determination to settle international disputes by way
of arbitration."[84] A thirst for power, for revenge, for
territorial expansion and for a new hegemonic order was on the verge
of reaching critical mass. In hindsight, one sees rather clearly that
the opportunities to avoid the coming global war had passed. Tens of
millions of innocent people would be killed, massive amounts of wealth
and natural resources consumed and the global ecosystem shaken by
firestorms and two nuclear explosions before the insanity ended.
Einstein, for one, understood the level of transnational commitment
and collective action required to have any meaningful impact on the
actions of those who govern. There was simply no means in his time of
accomplishing what had to be done. The task would fall to the
survivors:
Moral disarmament, like the problem of peace as a whole,
is made difficult of solution because men in power never want to
surrender any part of their country's sovereignty, which is exactly
what they must do if war is to be abolished. I am convinced,
therefore, that the solution to the peace problem cannot be left in
the hands of governments; rather, we must see to it that people who
are intellectually and morally independent pool their influence and
resources in fighting militarism. That is how we must counteract the
doubt and disillusionment which are currently undermining the
all-important influence of intellectual leaders.[85]
The isolationist posture taken by the United States government, the
only social democracy with sufficient industrial and potential
military power to check fascist ambitions, hastened what was probably
inevitable in any event. Ironically, after Einstein found refuge in
the United States he ended up playing an important role in the
eventual decision to develop nuclear weapons.
The last, if remote, opportunity for the social democracies to remove
the basis for the fascist ascendancy was the 1933 World Economic
Conference in London. If the United States would agree to the
cancellation of the debts remaining from the First World War, British
and French leaders could do the same with German reparations. These
measures would, perhaps, create an atmosphere in which protectionism
softened and an expansion of international trade could pull the world
out of the Depression. In the months directly preceding the
Conference, Roosevelt met in Washington, D.C. with leaders and
representatives from virtually every major trading partner of the
United States, including the Japanese, Germans and Italians. The U.S.
President was convinced that little progress could be made along the
economic front without disarmament and a firm nonaggression commitment
on the part of all nations. Adolf Hitler immediately responded to
Roosevelt by challenging the armed nations to disarm. Germany, after
all, was without even a credible defensive force. Hitler let the world
know, however, that absent disarmament he would bring German forces up
to parity with other nations.
Later in May, the U.S. delegation left to attend the Economic
Conference in London. Although Secretary of State Hull was the senior
official in the delegation, Roosevelt destroyed whatever potential
existed for an international agreement by instructing Treasury's
Oliver Sprague to make no concessions on U.S. policy concerning gold
and the adoption of fixed exchange rates. Roosevelt also had no
intention of canceling the war debts, even though payments from
Britain and France had already ceased. In this atmosphere, the
prospects for reducing protectionist tariffs and moving the pendulum
back in the direction of open markets were dismal. To the traditional
conflict between free traders and protectionists was added the
appearance of two schools of planners, one decidedly nationalist and
the other internationalist. In the end, the conference faltered
because Roosevelt refused to commit the United States to a scheme of
fixed exchange rates against sterling and the franc. Roosevelt later
explained his position:
This country knew, and all other nations knew, that we
were engaged at home in a great program of rehabilitation -- a
program which called for the raising of values -- and that no human
being could, at that moment, determine exactly where even a
temporary stabilization point should be fixed for the dollar, franc
and pound.[86]
Moley, who had remained in the U.S. to work with Roosevelt on other
matters, was directed by Roosevelt to join the others in London and
make sure they understood the firmness of his position. Roosevelt was
willing to reach an accord -- that is, to stabilize the exchange rates
-- but only insofar as doing so did not result in a collapse of the
dollar price for goods. Moley writes that Roosevelt directed him to "impress
upon the delegation ... that his primary objective was to raise the
world price level," and as had occurred in the United States,
other countries would reap the benefits of "raising prices,
relieving debtors and increasing purchasing power."[87]
Reaching London, Moley communicated Roosevelt's instructions to Hull
and waited. Faced with Roosevelt's intransigence, the French decided
to try to achieve at least some agreement on the principle of
stabilization as a long-term objective. At this point, Hull assigned
Moley and Oliver Sprague the job of negotiating a compromise. A long
explanation of the proposed agreement was cabled by Sprague to
Secretary of the Treasury, William H. Woodin, for his evaluation; an
earlier version of the agreement itself was sent by William Phillips
directly to Roosevelt. Despite the recommendations of Woodin, Hull,
Moley, Dean Acheson and Bernard Baruch, Roosevelt refused to budge.
Walter Lippmann, who had been in frequent contact with Moley and
others in the delegation, provided his assessment of what had happened
for public consumption:
Mr. Roosevelt cannot have understood how completely
unequipped are his representatives here to deal with the kind of
project he has in mind. For one thing, they do not know what is in
his mind. For another, there is not among them a single man who
understands monetary questions sufficiently to debate them. For
another, they have been so frequently repudiated that they are
demoralized. For another, they are divided among themselves. How can
a delegation, which lacks authority, which lacks technical
competence, which lacks unity, which lacks contact with the
President, hope to undertake the kind of difficult negotiation for
far-reaching reforms which the President desires? It cannot be done.
...[88]
Lippmann had arrived to cover the conference on June 23 and the
following day had renewed over lunch his friendship with John Maynard
Keynes. Britain's most outspoken economist had already expressed
support for U.S. reluctance to commit to fixed exchange rates (i.e.,
an effective return to the gold exchange standard). He now explained
to Lippmann why government spending on public infrastructure and
social welfare was essential to a full economic recovery. After the
announcement of Roosevelt's position, Moley and Lippmann were each
summoned by Britain's Prime Minister, Ramsay MacDonald, and asked to
use their influence with Roosevelt to reopen the door to compromise.
On the evening of July 4, Moley called a meeting that included both
Lippmann and Keynes, the purpose of which was to prepare a public
statement that would express Roosevelt's views in a manner that might
yet save the conference from dissolving. The President later gave his
approval, and the statement was released in London. It came too late.
The overwhelming majority of delegates could see no reason to
continue, and the conference was adjourned.
A few years later, Michael-A. Heilperin of the Graduate Institute of
International Studies in Geneva was one of the first to advance the
idea that before a new world order could emerge the old order would
have to collapse, and that the unfortunate mechanism would be a
destructive nationalistic conflict. "Internationalism,"
he wrote, "situates a country within the framework of a
collectivity of interdependent though politically sovereign States; it
looks for the solution of an individual country's problems within the
network of international relations."[89] In the context of
economic policy, then, internationalism
consists in the co-ordination of national monetary
policies; nothing is said about the nature of these policies. They
may be deflationary policies, stabilisation policies, expansionist
policies. So long as they are carried out concurrently by different
countries the international stability can be preserved.[90]
By Heilperin's definition those who governed the nation-states of the
world were still a great distance from adoption of an internationalist
approach to cooperative policy making. Force would, inevitably, have
to be used.
The weight of the Depression accelerated what had been a process of
incremental change; and, as governments sought a new equilibrium
between class interests the result was a combination of increased
regulation of industry and financial institutions, the introduction of
macroeconomic planning and an expansion of public services and public
employment -- funded by a combination of taxation (mostly on labor,
capital goods and commerce) and an expanded reliance on issuance of
government securities. Governments also exercised varying degrees of
control over the issuance of currency through the vehicle of their
central banks. If unchecked by domestic and international pressures,
governments could act unilaterally and expand the quantity of notes in
circulation. Keynes proposed that governments use these powers -- and
"a somewhat comprehensive socialisation of investment"[91]
-- in pursuit of a full employment economy, while preserving the
beneficial aspects of "the decentralisation of decisions and
of individual responsibility" as "the best safeguard
of personal liberty" and "personal choice."[92]
By his expression of these values, Keynes revealed himself to be a
transitional figure in the drama being played out around the globe. He
placed himself squarely at the center of a theoretical debate that
promised far-reaching policymaking implications. Almost everywhere,
the largely unpropertied majority were more than willing to trade some
or nearly all of their personal liberty and personal choice for
security, stability and employment. Governments were being pressed by
circumstances to become more proactively involved in economic matters;
and, in those societies already dangerously close to totalitarian
domination the State became a primary player in the markets by virtue
of central planning or outright nationalization of assets.
One point understood by economists was that the greater the
involvement of government as a catalyst for the production of goods
and the utilization of services, the less reliable would be the price
mechanism as the agent of equilibrium. Governments, after all, were
(in much the same way as private concerns in control of locations and
natural resource-laden lands) not subject to the constraint of first
having to produce before they could consume. When armed with the
additional power to self-create their own credit by means of currency
expansion, governments became the agent of wealth redistribution. In a
world where the concentration of wealth and income left so many
millions in desperate poverty, the use of these powers seemed to a
growing number of analysts to be the only solution. Wilhelm Roepke,
Heilperin's colleague at the Graduate Institute, described what he saw
as the grave dangers one school of economists were helping to unleash
on an unsuspecting world:
A liberal -- one [in Europe] who puts his trust in
economic laws rather than in the whims of government -- will
generally opt for the tied or automatic standard. A collectivist --
one who is willing to trust the caprice of the government over
natural economic forces -- will prefer the untied or manipulated
standard. Since, however, the linking of money to a precious metal
implies a much stricter control over the quantity of money than can
be expected from arbitrary government regulation, we find that,
paradoxically, it is the [European] liberal who, in money matters at
least, demands a discipline far stricter than the collectivist. ...
...While the liberal holds private initiative and free competition
to be desirable in the realm of goods production, he knows that
judicious regulation of the quantity of money cannot be expected to
emanate from those sources. What is needed instead is a carefully
thought-out system of monetary control instituted and supervised by
government.[93]
The best the private and public sectors had been able to come up with
during the long era of fractional reserve banking and government
sanctioned currency was to have governments monopolize the market for
precious metals. Stability in the purchasing power of currency
depended, in large part, on a steady inflow of gold derived from an
aggregate trade surplus with other countries. So long as currency was
perceived by holders as being as good as gold, things went
along smoothly. Roepke went further, vigorously arguing the case for a
gold-backed currency system. Countering Roosevelt's worries over
deflation, Roepke warned against "risky monetary schemes
aimed at banishing ... deflation," arguing that, "it
is inflation, and nowadays especially the insidious inflation of
credit money, which constitutes the greatest and most imminent danger."[94]
Only government could declare a currency to be legal tender, and only
government could force producers to accept that same currency in
payment for goods and services. Those who could do so would find
safest harbors to protect their assets from the actions of government.
For the very wealthy, a period of deeply depressed prices for material
goods and land was a good time to acquire these assets and hold them
in anticipation of eventual recovery. The same strategy of converting
currency to material assets might also be called for during a period
of rising prices. Holding currency in any quantity made sense only in
periods of relative price stability. Lower down the socio-economic
ladder, people had few if any options but to endure whatever came. The
best they could hope for was a general recovery and renewed demand for
labor. Until then, they could rely on government or unite to pressure
government to provide for them.
Governments hard-pressed for revenue could have looked to the assets
of the wealthy as a primary subject of taxation. A surtax on the
assessed value of land would have generated revenue, even if in the
short run the higher tax burden to landowners did not stimulate
development. That did not happen; it did not even occur to anyone in a
position to affect policy. Instead, governments resorted to borrowing
from the wealthy, hoping to find some sources of revenue to meet debt
service requirements as well as anti-recession programs. The
unemployed and working poor could not be taxed, and they had no
savings left to draw on. And, the wealthy proved increasingly
reluctant to invest in government bonds in those nations suffering
from depreciation in the purchasing power of currency. Absent a
willingness to tackle the underlying socio-political problems that had
created the so-called business cycle in the first place, political
leaders in the social democracies were eager to believe that the
proper management of fiscal and monetary policies could revive their
economies. In the countries run by statist regimes, coercion and
outright confiscation would prove to be more effective strategies.
RIDING OUT THE DEPRESSION
And The Drift To War Production
The general consensus of historians examining the Depression era is
that Roosevelt's decision to pursue a unilateral monetary policy
turned weak cooperation among the social democracies into outright
economic warfare. Economist Broadus Mitchell later wrote that this "
was probably the most momentous [decision] that Franklin Roosevelt
made."[95] Unanswered to anyone's satisfaction is whether the
President fully understood in the early 1930s that the looming
struggle for global hegemony was no longer between individual nations
but between societies associated by similar socio-political
arrangements and institutions -- the social democracies, the fascists
and the Bolsheviks. That social democracy was incompatible with
imperialism was not yet recognized. Imperialists in Britain and France
refused to accept a future in which their power and influence over
foreign peoples disappeared. Only the threat of global warfare
reopened discussions that acknowledged the need for international
cooperation. The dominant attitude remained one of mistrust and the
expectation that all negotiations came with hidden agendas. Roosevelt
was in certain respects an important exception. James MacGregor Burns
states in his biography of Roosevelt that his decisions were part of
an unexpressed vision of foreign relations by which "he
fashioned measures of international co-operation that enabled him to
veer back and forth between isolationism and internationalism as
political conditions required."[96] Or, more accurately, as
conditions permitted. Policies that on the surface seemed in the
national interest often had unforeseen consequences. Producers wanted
two things: protection from competition and access to any market where
they could expect profits. Thus, while the world's governments
embarked on a protectionist trade war, industrialists busied
themselves at finding ways to circumvent tariffs, quotas and taxes.
For example, companies based in the United States established
production facilities in over two hundred fifty other countries
between 1930-32 to escape the restrictions imposed by Hawley-Smoot. A
third of these investments were made in Canada. Sadly, the last idea
that would have occurred to Roosevelt or any of the world's leaders
was to move the global economy toward what Henry George described as a
fair field with no favors supported by a system of sound
money.
Absent necessary structural reforms, each nation attempted to pass on
to others (and to those at the bottom of their own society) the cost
of subsidizing monopolistic privilege and payment for government
programs. Within this context, and the impossibility of real change,
Roosevelt's nationalistic posture was understandable. Churchill and
many others in Britain thought as much. Keynes convinced Walter
Lippmann that Roosevelt had only done what was dictated by
circumstances, a message Lippmann later relayed in a speech at
Amherst. The economist O.M.W. Sprague, who had served as Chief
Economic Adviser to the Bank of England before becoming economic
adviser to the U.S. Treasury at Roosevelt's request, was among the
delegates to the 1933 international economic conference in London. He
resigned from his position as economic advisor to the U.S. Treasury in
protest over Roosevelt's monetary policies and from thereon stood with
the loyal opposition. He argued for more, not less, domestic
competition, for "a reduction in relative prices of those
goods and services for which a large increase in demand might
reasonably be anticipated"[97] (e.g., the construction of new
housing units), and for high wage policies as the best means of
stimulating demand and a recovery of profits. Without suggesting a
public policy solution, however, Sprague warned that a spurt in
housing construction could be accompanied by a rapid deterioration in
its affordability because of the operation of land markets:
Then again, there is the matter of land values. An
accelerated house-building program, even though costs are held down
or reduced, may be checked by an upward movement in the price of
land.[98]
Sprague does not comment on what measures might be employed to check
the upward movement in the price of land. Despite the dysfunctional
nature of land markets there would be a window of opportunity through
which many households might achieve home ownership. Eventually,
however, recovery of housing demand would attract investment in land
not for development but for speculation. If demand increased
gradually, the level of nominal wages might increase at a rate
sufficient to absorb the higher land cost component and not materially
affect the recovery. If rapid, the recovery would certainly be
short-circuited by an upward spiral in land prices. Whether or not
land prices would fall just as quickly as they had risen would depend,
in large part, on whether the nation's financial institutions had
extended credit to those who speculated in land. Not only would the
speculators begin to default on land loans, another round of bank
failures might ensue as well.
Although Sprague offered no means of resolving the dilemma, Harry
Gunnison Brown did what he could to bring attention to the proposals
articulated by Henry George to collect the annual rental value of
locations as a primary source of public revenue and a central means of
stimulating investment in productive activity. Neither Sprague, nor
Tugwell nor Berle paid any attention. What bothered Sprague most about
Roosevelt's attempts to achieve recovery through a general increase in
prices was the President's reliance on devaluation of the dollar, "a
depreciation which did not rest upon a firm foundation" and
where there "was always present an underlying tendency for
the dollar to reverse its course and appreciate."[99] In
Sprague's view, the dollar was certainly not overvalued in relation to
other major currencies. In fact, despite the tariff war the U.S. still
experienced a trade surplus, and the vaults of the Federal Reserve
Banks contained some $3.5 billion worth of gold reserves. Sprague
wondered how Roosevelt could possibly think the governments of other
countries would accept an increase in imports from the U.S. at the
expense of domestic producers. They would certainly raise tariffs or
depreciate their own currencies as a countermeasure. In fact, nearly
all countries except France had already abandoned the gold exchange
standard. Roosevelt was nonetheless determined to drive up the price
of gold by instituting a program of government purchases. Dean
Acheson, who had been charged with selling U.S. government securities
to the public, resigned in protest; investors, he argued, were being
deliberately cheated out of purchasing power.
In the minds of many observers, economic policy under Roosevelt
seemed to have no cohesive rationale. There was no way to accurately
forecast what was going to happen next or agreement on whether the
government should be proactive or wait to see if things improved or
worsened on their own. Walter Lippmann assessed the situation as
follows:
There are four philosophies at work in
Washington. First we had the internationalists versus the
nationalist view, then the nationalists split up into the planners
and the monetary people. Personally, being by temperament a skeptic
and having very little faith in the power of any formula to
encompass the enormous variety of real things I am an incurable
eclectic. That is to say, I believe in all four philosophies at the
same time and think the contradictions between them are much less
important than the positive contributions which each can make.
[100]
As 1933 came to an end, Roosevelt was heartened by signs that his
efforts to orchestrate currency depreciation seemed to be working.
Prices for certain commodities had, indeed, increased considerably.
Debtors were able to repay creditors with more easily obtained
dollars. On the social welfare side of public policy, important
strides had been taken to prevent the use of child labor (and thereby
increase the employment opportunities for unskilled adults) and to
establish a minimum wage in many industries. A significant victory for
workers occurred when the nation's coal mine owners agreed to adopt
minimum standards and not to interfere with union recruiting. In
January of 1934 the U.S. Congress passed the Gold Reserve Act, setting
the official price of gold at $35 an ounce and ending the government's
manipulation of the gold market. Nevertheless, although the depths of
the economic and social crises were far from over, Roosevelt's mandate
for change was already under attack. In the minds of a growing
minority, Roosevelt's programs represented not temporary relief
measures but a dramatic extension of Federal power executed by
bureaucrats not required to answer to the electorate. As restlessness
was forged into organized opposition, the Republicans established a
Bureau of Economic Research to counter Roosevelt's brain trust.
Herbert Hoover, far from being defeated in spirit, responded to the
New Deal with a serious book, The Challenge To Liberty. The
choices, and the consequences of taking Roosevelt's new
interventionist path, were plain to Hoover. "Our system has
at all times had to contend with internal encroachments upon Liberty,"
he acknowledged. "Greed in economic agencies invades it from
the Right, and greed for power in bureaucracy and government infringes
it from the Left."[101] Those who cherished liberty
understood what Hoover meant when he said that "all forms of
economic tyranny have long demonstrated that it was no system of
laissez faire."[102] Outside of the Georgist remnant, few on
either side of the political debate saw little or no relation between
the protection of liberty and the just constraint of freedom. Hoover's
great fear was that citizens would accept the erosion of democratic
processes and open criticism of government in exchange for a false
sense of security. The German, Italian and Russian peoples had, after
all, lost any opportunity to express opposition to the actions of
those who held power. In response, Hoover sent out a call to arms --
not for a return to the status quo of unbridled individualism and
privilege, but for change that treated with care the socio-political
arrangements and institutions established by the framers:
...[U]ntil recently, in all of our continuous
adjustments we have preserved the great individual rights with which
men were endowed by the Creator. Nor have we receded from the
Constitutional principle that not even government shall trespass
upon them.
Our American System has ever recognized that the borders between
liberty and license, between free speech and slander, order and
disorder, enterprise and exploitation, private interest and public
interest are difficult to define. But the domain of liberty can be
defined by virtue, reason, by the common will, and by law. It cannot
be defined by arbitrary power.[103]
One is moved to ask whether Hoover in his defense of individualism
demonstrated a clear appreciation for the distinctions between liberty
and license. The framers dislodged from the American System
the Old World's formal preservation of hereditary privilege, but a
good deal of privilege remained entrenched and carried forward from
one generation to the next. Hoover could not dispute Roosevelt's
observation that much of the wealth of Americans was inherited. All he
could do was call for a renewed commitment to equality of opportunity
and "a just diffusion of national income which will give
protection and security to those who have the will to work."[104]
He now realized that the American System had become corrupted
but he did not have a clear idea of how to resurrect the idealism and
clarity of purpose exhibited in the writings of men such as Paine,
Franklin, Adams or Jefferson:
...[Liberty] does not hold that there is a license of
business to exploit; on the contrary, it holds that economic
oppression is servitude. The American System holds equally that
monopoly, group or class advantage, economic domination,
Regimentation, Fascism, Socialism, Communism, or any other form of
tyranny, small or great, are violations of the basis of
Liberty.[105]
Hoover reminded his fellow citizens of the remarkable accomplishments
of their society, under conditions where government's most important
contribution had been to allow individuals to come together in
cooperative enterprise. Civic and community leaders were joined by
university-educated professionals in campaigns to clean and rebuild
cities, provide more broad-based and efficient public services and
bring the blessings of republican democracy to the millions of
immigrants who poured into the country. The pattern of incremental
reform had been interrupted by a global disaster; even these terrible
circumstances did not point to a bankruptcy of the American System.
What the Depression accomplished was to bring to light the abuses
liberty had been subjected to. Roosevelt's response - the strategy of
"economic Regimentation" characterized by "a
vast centralization of power in the Executive"[106] - was the
wrong corrective course. He pointed to the adoption of production and
pricing guidelines under the National Industrial Recovery Act as the
reason so many smaller, independent producers had gone out of
business. Not unexpectedly, Hoover's analysis failed to identify the
system of land tenure and taxation as a problem to be addressed in
order to cleanse the American System of monopolistic privilege
and the profits of rent-seeking.
Hoover notwithstanding, Roosevelt's response to his critics seemed
sincere enough. In the interest of full public disclosure and
objectivity, Clarence Darrow was asked to chair a committee
investigating the actions and achievements of the NIRA. Around the
nation, the great industrial landlords continued to resist worker
attempts at collective bargaining. Violent strikes erupted by
longshoremen and truckers, as well as aluminum, steel and railway
workers. When the votes were counted after the 1934 elections, the
Democrats emerged even more solidly in control of the U.S. Congress
than previously. Roosevelt gave people reason to believe he would take
action; now, with an overwhelming majority in the U.S. Congress, an
accelerated pace of recovery and amelioration of suffering was bound
to be expected. Standing in the way, however, was a well-organized
conservative challenge that included leading old-line Democrats, as
well as a wide range of extremist groups of various stripes. Al Smith
and John W. Davis (who had run for President in 1924 against Harding)
left the Democratic Party to join the American Liberty League, founded
in 1934 by a group of wealthy industrialists to defeat the New
Deal. The actions taken by Roosevelt to meet these challenges have
been interpreted differently by historians and others based to a
significant degree on their ideological bias. He either saved the
republic from violent societal upheaval, or facilitated the
introduction of Federal and Executive power that has effectively
stifled efforts to achieve real structural reform. Whichever is the
case, he was motivated by a respect for the seriousness of the
circumstances. One historian, George Wolfskill, put it this way:
With the mounting pressure of conservative and radical
factions forcing the issue, Roosevelt made his choice. It was to try
to alleviate the miseries of the masses through the most
far-reaching program of economic and social legislation ever
undertaken in the history of the Republic.[107]
Walter Lippmann, surveying the landscape of the New Deal,
thought he sensed the emergence of a new socio-political philosophy,
what he called "free collectivism," which (in
spirit) touches on one of the important components of cooperative
individualism - the adoption of socio-political arrangements and
institutions that promote cooperative behavior by ensuring equality of
opportunity. This "method of social control," wrote
Lippmann, "is collectivist because it acknowledges the
obligation of the state for the standard of life and the operation of
the economic order as a whole." Equally important, "[i]t
is free because it preserves within very wide limits the liberty of
private transactions."[108] Roosevelt was not, of course, a
political philosopher armed with a grand scheme. He was a pragmatic
political leader who recognized the need for frequent compromise.
Whether he compromised his own principles is a conclusion I leave to
Roosevelt scholars. A more important question is whether the Roosevelt
influence was to be permanent and deeply-penetrating or largely
overturned as conditions improved and power returned to those who
benefited by laissez-faire protectionism and entrenched privilege.
One of Roosevelt's next steps was to obtain passage of an Emergency
Relief Appropriations Act, supported by an allocation of nearly $5
billion in Federal funds. The Public Works Administration used part of
the appropriated funds to modernize the nation's infrastructure, while
the Works Progress Administration put millions of people to work. What
soon became evident was that Roosevelt had far less to fear from
Liberty League members than from the Supreme Court of the United
States and questions of constitutionality raised by New Deal
legislation. In January of 1935 the court ruled that NIRA could not be
applied to the interstate transport of oil and in May declared the
detailed and frequently arbitrary regulations adopted by the National
Recovery Administration unconstitutional. Almost at the same time, the
Congress passed the National Labor Relations Act, which Roosevelt
signed, strengthening the position of organized labor. Legislation
followed establishing a graduated corporate income tax, increasing the
maximum tax rate on marginal personal incomes, providing unemployment
and old age benefits and attacking the privileges of holding
companies.
Practitioners of orthodox economics worried over Roosevelt's
astonishing inroads into the traditional structure of markets.
Princeton University's Edwin W. Kemmerer, for example, offered his
services as a speaker to the Liberty League and was joined by more
than a few of his professional colleagues. An English translation of
Joseph M. Schumpeter's analysis of business cycles had just been
published by Harvard University, and with this theoretical work was
the door was opened wider for the future use by government of monetary
and fiscal tools with the object of managing economic growth.
Acknowledging "that the economic system does not move along
continually and smoothly,"[109] Schumpeter went on to offer
his insights into the reasons why this was so. There were, of course,
numerous forms of external shocks (e.g., wars and natural disasters).
Even without these influences, however, the behavior of individuals
and groups produced the cyclical movements from expansion to
contraction and back. Periods characterized by rapid innovations bring
on what Schumpeter described as "the swarm-like appearance of
new combinations" and "supernormal stimulation"
of capital investment and "the characteristic rise in prices
during booms ... increased need or increased costs alone can[not]
explain."[110] In a footnote, he adds:
In principle rents must also rise. But where land is let
on a long lease they cannot do so, and in addition many
circumstances prevent the prompt rise of this branch of income.[111]
What this particular observation ignores is that many who hold land
are recipients of imputed rental income because they make no or very
low payment to anyone for the privilege. Historically, landowners are
under little financial pressure to bring land into production or to
the market. They might obligate themselves to a long-term relationship
with a particular tenant; however, very few such leases are made at a
static annual ground rent. Increases in the rental value of locations
are generally captured by landowners through terms that permit
periodic escalation. During periods of downturn, on the other hand,
rents charged tend to remain above the true market rental value (at
least for a period of time), causing the net wages and interest
returned to the user (which are falling rapidly in response to the
market downturn) to fall even more deeply. The result is a chain
reaction of business failures and bankruptcies. One need only look
closely at what happens to the cash flow received by owners of
commercial, office and retail space during periods of downturn.
Business failures turn the market for improved locations into a
buyers' market. For those who hold title to the location as well as
the improvements, the absence of a ground rent payment to a third
party allows them to absorb a reduction in imputed rent without the
same degree of impact on net cash flow as someone faced with a ground
rent payment that is sticky downward.
What Henry George's analysis of the business cycle tells us, and
experience confirms, is that the natural system of production and
distribution does in fact generate a boom-to-bust cycle, but a cycle
consistently and predictably responsive to the application of
appropriate tax policy. On this particular subject, Schumpeter at this
point in his career had nothing to say.[112] Only Harry Gunnison Brown
and a small number of other economics professors around the globe
remained vocal in their belief that economic rent should be taxed at a
very high rate. And, as Christopher Ryan concludes, "the
reputation of Harry Gunnison Brown appears to have suffered as a
result of his persistent espousal of George's cause."[113] At
the same time, few economists were lining up to join with Rexford
Tugwell in his quest for direct government management of the economy.
Although Tugwell later accepted criticism for failing to recognize the
importance of achieving consensus and moving incrementally, he thought
Roosevelt rather timid responding to the Depression:
He seems heroic to those who measure his amazing
resemblance to Hoover -- under a contrasting mask. They do not
realize that both saw the same light and both followed it. Hoover
had wanted -- and had said clearly enough that he wanted -- nearly
all the changes now brought under the New Deal label. ...
...[T]he Roosevelt measures were really pitiful patches on agencies
he ought to have abandoned forthwith when leadership was conferred
on him in such unstinted measure. I thought then he could have, and
I now think he could have. The full tragedy of his turning away was
measured in later troubles. Unless I am mistaken, painful
reorganizations are still to be gone through.[114]
Tugwell's inclinations were toward a far more collectivist,
centrally-directed society than Roosevelt ever contemplated. Tugwell
was joined by Keynes in a recognition that in a world already
operating under the weight of protectionism, the responsibility of
government was to broaden and raise the level of individual purchasing
power at home. This required, argued Tugwell, central planning and
programs to redistribute income from the haves to the have nots,
either directly or indirectly through the development of the welfare
state.
Within the Roosevelt cabinet, Cordell Hull and Henry Wallace were the
strongest voices against the arguments for economic nationalism and
isolationism gaining ground as the basis for policy. As Secretary of
State, Hull's reaction was based on the dangers of using trade
restrictions as a political weapon. Wallace, on the other hand,
foresaw only great troubles for U.S. farmers if they were cut off from
lucrative export markets. Both Hull and Wallace were, however,
instrumental in getting the Congress to pass the Reciprocal Trade
Agreements Act in June of 1934. Out of this came a new approach to
trade negotiations that made tariffs and quotas bilateral in nature.
Hull had hoped for a return to free and unrestricted trade but was
willing to settle for an increase in imports that would reduce the
amount of debt owed by Old World governments to the U.S. This, in his
view, was essential for global stability and a reduction in the
tensions building across the Atlantic. Once again, however, such
measures were simply too little, too late. The great cleansing was on
the horizon, and millions of innocent people would pay the ultimate
price for the foolishness practiced by those in possession of power.
Despite the determined opposition of the privileged -- or, perhaps,
because of it -- Franklin Roosevelt was returned to the Presidency in
1936. Roosevelt was now more convinced than ever that the
concentration of industrial production and of wealth were primary
causes of the nation's lingering ills; more importantly, he was ready
to use the powers of government in order to secure a more level
playing field. The result was an Executive branch committed more
deeply to legislative reform and regulation than to the type of
industrial planning desired by Tugwell. Raymond Moley quickly became
disaffected by the intensification of Roosevelt's verbal and policy
attacks against the institutions of the wealthy. He now reached the
point where he could no longer remain in government service and
decided to accept an offer by Vincent Astor, Averell Harriman and Mary
Harriman Rumsey to establish and edit a new weekly news journal. He
remained a confidant and frequent adviser to Roosevelt until mid-1936,
using his editorial position to support New Deal legislation until his
final break with Roosevelt. Ted Morgan surmises as well that Moley was
largely responsible for Roosevelt's decision to formally recognize the
Bolshevik government in Russia. What finally pushed Moley into the
anti-Roosevelt camp was the President's acceptance of a permanent
responsibility by the Federal government for many functions Moley
considered the legitimate -- and constitutional -- province of the
states. Thus, with Moley's departure the original Brains Trust
was dislodged in favor of individuals who thought the nation needed an
overhaul of long-standing socio-political arrangements and
institutions. Of Roosevelt's first three years in office, New Dealer
Gardiner C. Means told Studs Terkel, "There was no question
in our minds we were saving the country. ...People who were personally
concerned about a better world, came to Washington, were drawn to it.
Even though where we were going was still to be worked out. There was
an elan, an optimism ... an evangelism ... it was an adventure."[115]
According to Moley, much of that enthusiasm disappeared after
Roosevelt's reelection:
The second New Deal was an entirely different thing. My
disenchantment began then. Roosevelt didn't follow any particular
policy after 1936. Our economy began to slide downhill -- our
unemployment increased -- after that, until 1940. This is something
liberals are not willing to recognize. It was the war that saved the
economy and saved Roosevelt.
We had a slight recession in 1937, which was occasioned by his
attack on copper prices, specifically, and on business, generally.
Of course, his Supreme Court packing plan shocked the people. They
resented it. It was his first great defeat. Then he tried to purge
Congress in '38. Everyone he tried to purge was re-elected, except
one Congressman in New York.
I think if it weren't for the war, Roosevelt probably would have
been defeated in 1940. You would probably have had a more
business-minded Administration: less centralizing on the part of
Washington. More normal conditions would have prevailed.[116]
Roosevelt's attack on the Court was a political fiasco. The President
felt he needed an accommodating body of jurists on the Supreme Court
and attempted to orchestrate a legislative coup to, as Moley writes,
pack the court with his own appointees. Although this failed, seven of
the nine justices departed on their own between 1936 and 1942. In the
absence of any effort to capture economic rent for public use,
Roosevelt committed the government to entitlements and redistributive
measures -- the foundation for a welfare state. The four years of
Roosevelt's second term were characterized by a real loss of national
unity. In the process, Republican and Democratic party leaders had
legitimate reasons to fear the ascendancy of a militant third party
movement. That socialists largely adopted incrementalist strategies in
support of the New Deal and radicals failed to attract large
followings must be credited to Roosevelt's calming style of
leadership. Within the government and even his own administration, he
played the moderating role between those who sought more extreme --
and sometimes opposing - approaches to policy. This was certainly true
where his economic advisers were concerned.
Although Tugwell had been the economist closest to Roosevelt during
the formative years of the New Deal, numerous other economists found
opportunities to influence public policy by joining the agencies
created by the Administration. Schlesinger identifies one economist in
particular, Mordecai Ezekiel, as playing a key role in the development
of the Federal government's program to stimulate agricultural and
industrial production by making forward commitments to purchase unsold
surpluses. Producers agreed to achieve specific levels of output,
creating markets for one another in the process, with the Federal
government as the purchaser of last resort. Success under such a plan
required, argued economist Gardiner Means, a level of understanding of
the national economy that economists did not yet have. The process of
data collection and analysis was labor intensive and an undertaking
few thought possible. Means nonetheless took on the challenge and
began his research in late 1935. Those on the inside were in a sense
committed to the use of government power in ways not previously
contemplated. The objectives were two-fold -- to tame the business
cycle and to solve (or at least significantly mitigate) the problem of
widespread poverty. In 1936, two books appeared that offered very
different interpretations of the problems and solutions. The first
cemented for all time to come the influence of John Maynard Keynes.
The second, by the philosopher George Raymond Geiger, dealt once again
with land and markets and failed to attract a broad audience.
|