A Patriot's History of the Modern World (45 page)

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

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

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

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

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

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

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

Fascist Miracles

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

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

The French also were envious of German economic health as they battled domestic labor problems, including a 1938 strike at the Renault plant that Prime Minister Édouard Daladier successfully put down. Capital steadily seeped out of France throughout the late 1930s, making its finances precarious as Hitler began his mischief in Czechoslovakia and Poland. Of course, neither Germany nor Italy enjoyed the kind of economic strength that Americans and French ascribed to them. German exports of chemicals and electronics, with an established postwar presence in Hungary and the Balkans, had collapsed due to inflation in the 1920s, and the German capital there was quickly replaced by investments from the British and French. German industry also faced new competition from the ubiquitous Americans, whose General Electric competed in these regions with I. G. Farben and Siemens. Germans saw such industrial encroachments as threats to national security; Foreign Minister Gustav Stresemann said without I. G.
Farben and coal, there was no foreign policy, and the Austro-German customs union of 1931 was largely aimed at excluding French and British goods from their countries and breaking the western powers' growing grip on Czechoslovakia and the Danube region.

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

Germany followed a two-pronged economic strategy of seeking regional trade dominance and getting the Allies to lift their demand for reparations. The latter finally occurred at the Lausanne Conference in 1932 in which Germany, Britain, and France agreed to end the burdens of Versailles as it was becoming evident that the worldwide depression was making further reparations impossible. Under Lausanne, a one-year moratorium on payments became permanent, with the understanding that Germany would negotiate with the United States for further assistance in meeting outstanding debts. But the Americans rejected the plan in 1932, and the prior Young Plan (1929) had expired, making the debt relief permanent. Once relieved of its reparation obligations, however, Germany saw little incentive for close relations with the United States, and the potential for American influence on German domestic politics vanished. It would be too strong to say that the end of reparations enabled the rise of Hitler, but it certainly minimized the advantages of German-American friendship.