Did the New Deal Succeed or Fail?

A Review of Jim Powell’s FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression

Jim Powell was born in Norfolk, Virginia and grew up on Long Island. He was a librarian, an art market expert, and a historian in the study of liberty. He graduated from the University of Chicago. He also worked as a journalist for several magazines such as Barron’s, mostly writing articles on the art market. He is currently a Senior Fellow at the Cato.

BY EUGENE SHIN

Many historians understand that Franklin D. Roosevelt’s New Deal helped bring about an end to the Great Depression. Indeed, Jim Powell says that the “Great Depression has had an immense influence on our thinking, particularly about [the] ways to handle an economic crisis.”1 Yet he argues that “the Great Depression as we know it was avoidable” and that “high unemployment persisted during the 1930s because of a succession of misguided New Deal policies.”2 Unlike many historians who paint a favorable view of the New Deal, Powell chooses a different approach and thoroughly criticizes nearly all facets of government action concerning the Great Depression. Powell makes the concession that even though FDR and his “brain trust” had the best of intentions in trying to end the Great Depression, they, especially FDR himself, “assumed unprecedented arbitrary power supposedly need[ed] to get America out of the Great Depression.”3 His main argument throughout the paper is that FDR abused his power to create New Deal policies and in the end, created chronic high unemployment—a criterion he believes defined the decade of the Great Depression. In FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, Jim Powell argues that every portion of the New Deal “was not a recovery program, or at any rate an effective one.”4

Before moving on to the bulk of his argument, Powell gives his reader a taste of who the people involved in the New Deal were. He explicitly states that FDR and most of his advisers had no intention of prolonging the Great Depression, but lacked the political experience needed to handle a crisis such as this one as they have failed to cure “the number one social problem of the Great Depression—chronic high unemployment.”5 While praising FDR and all of his brain trust, he blames many of their mistakes on two aspects; First and foremost, he criticizes the Progressive movement and its influence on FDR, claiming that those ideas were theoretically flawed. He also mentions that several key figures in FDR’s administration pulled much of their experience from being players in the domestic control of the United States during World War I. As a result, FDR’s advisers treated the Great Depression as a national emergency and instituted controls of arbitrary power. He does, though, give due credit to FDR and each member of the brain trust in a short biography of his or her accomplishments. When discussing the actual cause of the Great Depression, though, Powell takes the non-traditional approach of exclusively blaming the Federal Reserve. By changing the discount rate too much too quickly, the “Federal Reserve policies began a monetary contraction” that “brought on a depression in output, employment, and income.”6 Combined with the states’ unit banking laws and Hoover’s failed measures, the government alone effected the Great Depression. He then criticizes FDR’s banking policies such as the bank holidays, which made anxious depositors withdraw savings prematurely, the Glass-Steagall Act, which broke up large banks but failed to protect the more vulnerable unit banks, and the Federal Deposit Insurance Corporation, which made depositors and banks more willing to take risks since they knew that lost savings would be reimbursed.

Powell further strengthens his argument that FDR arbitrarily abused power by citing his harmful takeover of all public gold. Believing that “FDR became convinced that to solve the country’s financial crisis the federal government had to gain total control over money,” he applied that ideology “under considerable pressure to pursue inflation, especially from farmers who wanted higher agricultural inflation.”7 However, this attempt to buy up and seize gold failed to raise prices and strained foreign relations. Possibly the most outspoken of Powell’s complaints was the factual tripling of taxes during the Depression to fund the various New Deal relief programs such as the Public Works Administration and the Civilian Conservation Corps. He delineates that “effective tax rates would have increased even if nominal tax rates stayed the same. But FDR pushed for higher tax rates.”8 Powell’s main complaint about higher taxes lies in that they discouraged corporate expansion—a factor he believes is necessary for the promotion of business expansion and the creation of new jobs. The relief program themselves contributed to the chronic high unemployment as well. Major proof of this relates to the fact that “42.6 percent of federal relief and public works expenditures were paid for by tax increases, and 57.4 percent were paid for by borrowing money—which ultimately had to be paid out of future taxes.”9 The Public Works Administration hired only skilled workers to build public works projects, leaving poorer, unskilled workers in the dust. Perhaps the most shocking aspect about the relief programs was that FDR intentionally channeled his relief programs to Western states in order to win the votes of more reluctant peoples, than spend money on places where political support was virtually guaranteed. Additionally, the National Industrial Recovery Act controlled buying and selling prices, and forced closed shop unions. The NIRA prolonged the Great Depression by cutting several jobs due to minimum wage laws, creating a nationalistic monopoly, suppressing low-cost suppliers, and inhibiting the overall creation of capital.

A major part of FDR’s New Deal included a burst of recovery toward farmers, who had been suffering since the 1920s. The Agricultural Adjustment Act set limits restricting the output of agricultural products in order to raise prices, giving farmers an edge. However, Powell also puts to light the other measures that cut international trade of grain and the dumping of “any additional quantities overseas at lower prices than in the United States.”10 Additionally, the NIRA hurt farmers from the increased price of manufactured goods used for farming, and farm foreclosures remained high due to the low demand of farmers. Powell also devotes an entire chapter to the failures of the Tennessee Valley Authority, something he believes to be the brainchild of Progressivism. Powell comments on the TVA’s dependence on the rest of the nation for taxpayer money and other measures that prevented other energy-producing services to compete with it. Breaking away from his trend of criticism, Powell focuses on certain justices from FDR’s Supreme Court; while criticizing FDR’s supporters such as Brandeis, he praises the “four horsemen of reaction” who strongly held their own against many of his programs, even helping to put an end to the AAA and the NIRA. In the latter case, the explanation was that it “violated the constitutional principle of delegated, enumerated powers.”11 Additionally, Social Security would spur FDR’s idea for a payroll tax that would contribute to a social security fund, beginning to distribute funds to the elderly in 1940. Powell hypothesized that the cost of employing would go up, in addition to putting a heavy debt on future generations. The New Deal labor laws, such as the Wagner Act, also threw several employees out of work due to the forced closed shop policy and labor monopoly. By “further blam[ing] employers for the Great Depression,” labor unions took complete control over the businesses themselves, sometimes using prolonged strikes to halt business and forcing a slowdown in employment.12

Since FDR knew he would be criticized for some New Deal measures, he “wondered if he might be able to expand the Supreme Court with sympathizers.”13 While his court-packing plan at first seemed to carry through, it was quickly turned down by the Supreme Court for violating the enumerated powers granted by the Constitution. Powell states that meanwhile, the Court held many of the harmful New Deal laws, such as minimum wage, Wagner Act, Social Security, and unemployment compensation. He then jumps to the effects of the New Deal acts up to this point on the Roosevelt Recession. Among the causes, he lists the slow nature of the Fed and bad regulators. Most importantly, he points out the “1938 depression brought fresh opposition to New Deal policies.”14 Not only did the New Deal hamper the raising of the employment level, lawyers such as Thurman Arnold were hired to break up monopolies, destroying potential sources of employment. In the last parts of the book, Powell speaks of the effects of the New Deal since the 1930s such as the income cap, risk-promoting nature of the FDIC, progressively worsening Social Security, debt collected the TVA, and overall subverted nature of economic liberty. Finally, Powell concludes the book by providing suggestions on how to avoid future depressions by staying well clear out of FDR’s path.

Historian Jim Powell’s thesis is, simply put, that Roosevelt’s New Deal prolonged the Great Depression by sustaining high unemployment. Nearly all facts and arguments in his book contribute directly to this argument, as he argues how each letter in the “alphabet soup” hampered recovery in place of reform. However, Powell’s argument seems to expand beyond his stated thesis and has a second implied thesis throughout the book: government involvement during a crisis only creates economic and political problems. As with the last argument, the vast majority of his arguments and statistics point toward this fact. He also uses pathos to turn the reader against government action since he constantly maintains a condescending attitude toward all parts of the government, from the Fed to Hoover to FDR. Much of his disdain can be traced to his previous works regarding individual liberty before the publication of this book; his ideology pushed him to shape his thesis primarily against the federal government, which he views constantly threatens the individual liberty of individuals and businesses. One chapter titled “How did FDR’s Supreme Court subvert individual liberty?” ostensibly has no relation to his stated thesis. While he does mention how FDR wanted to protect his New Deal policies, Powell is obviously disturbed that “FDR would … sustain his expansion of federal power.”15

At first glance, Jim Powell seems to be influenced by the New Right and grass-roots conservatism movement. However, his pretended New Right point of view regarding progressive movements such as the New Deal is attributed to his fear of repression of liberty. The book was written in 2003, when George W. Bush had started the invasion of Iraq, increased taxes, and centralized government even more. Powell may have interpreted arbitrary extension of government power as a threat, resulting in his point of view while writing. As Powell comments, even “John Maynard Keynes recognized that FDR’s priorities were subverting the prospects for ending high unemployment.”16

Many other historians, economists, and journalists have praised this book for its well-documented account of the New Deal’s harms. In “FDR’s Folly-and What Obama Should Learn from It,” David Thornton summarizes much of Powell’s argument in a nutshell but later comments on how later presidents who taxed higher would cause economic stagnation, as “other presidents, such as Lyndon Johnson, Richard Nixon, Jimmy Carter, and our own Barack Obama found that high levels of taxes and regulation led to economic stagnation, high unemployment, and rising inflation.”17 In Gregory Schneider’s review, “Raw Deal,” he points out that criticism of the New Deal no longer falls in the realm of Conservatives but “it seems only libertarians” care about hatred of the New Deal.18 He also touches upon the political success of the New Deal that Powell never mentions. Schneider also comments on the recent political developments, stating that even conservative administrations and congresses fail to live up to previous conservative claims of removing New Deal acts such as Social Security.

The thesis of FDR’s Folly is by no means a wrong or incorrect interpretation of the New Deal. The most convincing aspect of his book lies in that he uses extremely convincing statistics, combined with cause and effect, so richly and so efficiently that he almost establishes causality between the New Deal and the decade-long Great Depression. However, as a criticism of the New Deal, this book delivers not a counter-argument but rather a restatement of an argument—a quite angry one at that. One of Powell’s most egregious errors in writing about a thesis contrary to popular opinion is his lack of counterargument. At no point in his entire book does he address some of the arguments supporting the New Deal’s positive effects such as the rise in GDP during the 1930s. In fact, it seems as if Powell omitted several pieces of information for the sole purpose of making his argument more convincing and coherent. When stating that “nobody had made clear why state securities regulations apparently had failed to protect investors,” Powell most likely omits information at this point in order to have the appearance that the federal government was incompetent.19

Powell confidently addresses how the Great Depression—and the New Deal in particular—marked a watershed in political, economic, and cultural history. Powell confidently states that “the Great Depression was probably the most important economic event in twentieth-century American history.”20 Although he deftly criticizes progressivism throughout the book, he toots the New Deal as the flagship of progressivism. It can be inferred that the New Deal sparked the revival of progressivism during the 1930s. While he never addresses Harry Truman, Lyndon Johnson, or their progressive “deals,” he suggests that FDR’s New Deal served as a gateway into their programs. Economically, it marked the beginning, yet again, or continual government spending in order to bolster the economy, much to the harm of the federal deficit. Culturally, the Great Depression made the sacrifice of economic liberty the status quo for several decades while presidents who wanted to expand the government were in power.

While the New Deal may not have necessarily improved the economy, it certainly did set the political trend of liberalism and the New Left for quite some time since the New Deal was perceived to be a success. FDR himself marked the rebirth of Liberalism, and his perceived success only helped the Democratic Party even more. At that time and the decades following, it was believed that Coolidge’s lasseiz-faire government policies were the cause of the Great Depression; therefore, FDR’s government aid and spending was thought to be the solution for stimulating the economy and getting the nation out of the Great Depression. Economically, the 1930s introduced the Keynesian deficit spending as the new standard for liberal presidents and administration such as Obama. Whether or not that policy of fiscal spending was successful, FDR during the 30s set the precedent for all liberal presidents following him, including Truman, Johnson, and Obama. While Powell says “Americans can only hope that knowledge of past mistakes” can prevent future ones, much of the “damage” has already been done.21

Since several parallels have been drawn between the current recession and the Great Depression, many people have asked how the 1930s have impacted the current world. Since “taxing … surged more than tenfold in World War II,” the decades after the Great Depression had been severely hit.22 Since Powell holds that little government involvement is the best, he would probably attribute Obama’s strategies as derivatives of FDR’s; of course, he would criticize Obama for unnecessarily spending too much of tax money and bailing out businesses with excessive loans.

Countless historians have astutely proved and stood up for the New Deal and its effect on ending the Great Depression. For a twist, FDR’s Folly proves a worthwhile read to hear the other side of the argument. Much of its argument may be flawed, but the fact that the thesis and the argument is made at all proves that the “New Dealers really came to believe that their knowledge, combined with political power, could cure the problems of the world,” but they didn’t.23

Endnotes

Student Bio

Eugene Shin was born in San Diego, California. He is currently taking several classes at Irvine High and wishes to become a scholar at college at what he desires to do. He enjoys playing video games and would like to thank his parents for constantly supporting him.