The New Deal Was No Deal (part III)


The Roosevelt era meant a considerable push forward in the ratchet-like evolution towards overall government planning of the economy. As is apparent from the plethora of decrees enumerated and analyzed above, the actions toward the professed government take-over of the economy did not develop according to a road-map well thought in advance, but rather in an erratic zigzag fashion.

[This is part III of an article previously published in Procesos de Mercado, vol. VII, no. 2, autumn 2010. Read part I, part II, part IV.]

Overall effect: fascism and destitution

As we can see from the laws analyzed above, the Roosevelt era meant a considerable push forward in the ratchet-like[1] evolution towards overall government planning of the economy. As is apparent from the plethora of decrees enumerated and analyzed above, the actions toward the professed government take-over of the economy did not develop according to a road-map well thought in advance, but rather in an erratic zigzag fashion.

Historians suggest this was due to Roosevelt’s reported lack of fundamental political values and also determined by what we can identify as the logic of political competition. Even if Roosevelt would have held staunch political beliefs and even if his surrounding advisers would not have had differences of opinion and even if all the American citizens would have been voluntarily mobilized under his government program, it has been theoretically shown that it is impossible to plan an entire economy as a private company. It is therefore, no wonder and no accidental reason that the whole scrutinized period evoked[2] a

vast hippodrome, that hectic, whirling, dizzy three-ring circus with the NRA in one ring, the AAA in another, the Relief Act in another, with General Johnson, Henry Wallace and Harry Hopkins popping the whips, while all around under the vast tent a whole drove of clowns and dervishes—the Henry Morgenthaus and Huey Longs and Dr. Townsends and Upton Sinclairs and a host of crackpots of every variety—leaped and danced and tumbled about and shouted in a great harlequinade of government, until the tent came tumbling down upon the heads of the cheering audience and the prancing buffoons.

Furthermore, Flynn distinguishes between three sub-deals into the Roosevelt New Deal. The first one is characterized by the most overt drive toward fascism with host of regulations and public projects, the second by the emphasis on spending and the third by the regimentation of the Second World War.

However, the legislation considered unconstitutional by the Supreme Court was swiftly replaced by Congress under the sway of the Roosevelt Administration with Acts bearing a different name but essentially the same content[3]. It may be argued that the enduring general recipe for recovery was sketched along the lines of what will come to be known as the Keynesian solution: to kick-start the economy into a spiral of rising prices up to the high mark of 1929 and beyond.

This was to be achieved by increasing nominal and real wages, reducing unemployment by public projects and thus confer purchasing power in the hands of the work-force. Then, to the extent that consumers would be hoarding this excess purchasing power, the government was supposed to intervene so as to substitute private investment with public spending.

In the end, the prices of agricultural and manufactured goods in USA had to be brought in different ways in relative harmony with each other, that is, to give more relative height to agricultural prices, and to a higher overall level. The results were far from satisfactory.

Chart no. 1: GDP in Billions of Current Dollars. (Source: U.S. Department of Commerce)

The New Deal was the era of contradictory rules and arbitrariness. The NRA was pushing for cartelization while the prior anti-trust laws forbade it. The inflationary policy contradicted with the idea of a fixed exchange rate inherent in the international gold exchange standard that US joined de facto after going off the gold standard.

The internal cartelization, production micro-management and price control, on the one hand, and the augmentation of the supply of paper dollars, on the other hand, were destined to introduce wide-spread economic chaos. The intentions of introducing financial conservatism through the Glass Banking Act and the close financial scrutiny by the Securities and Exchange Commission could not square well with the Thomas Amendment and the introduction of the Federal Deposit Insurance.

The AAA was spurred by “acute economic emergency” to fight the “severe and increasing disparity between the prices of agricultural and other commodities”[4] and bring about a relative increase of agricultural prices as compared to industrial prices.

Meanwhile, the NRA was accusing the “national emergency productive of widespread unemployment and disorganization of industry” to introduce the solution of forced cartelization and collective bargaining against “destructive wage or price cutting.”[5] Above all, the spirit of arbitrariness and bureaucratic absolutism was the characteristic of the Roosevelt period[6]:

New rules and new procedures were announced with great frequency, creating violent speculative disturbances and creating new business uncertainties.

Robert Higgs investigated on the possibility that this state of affairs introduced what he calls “regime uncertainty” as a cause of depressed private investment. Short of complete lack of knowledge about the level of enforcement of the above measures, I contend that there is no need to look at proxy measures for increased uncertainty (such as opinion polls[7]) to know the effects of the New Deal.

Unless the tens of Congress Acts were dead letter and all political activity was unheeded by the public and businesses and any enforcement effort made by the government, we can be sure simply by way of deduction that the economic outcome could not be better than it would have been in the absence of these measures. It must have been far worse, actually. But how much worse and how did each of these Acts and their subsequent enforcement affect the general state of affairs is the task of historical investigations, and arguably much more difficult to gauge.

What is important at this point is that not one of the pieces of legislation mentioned above can be credited as a genuine anti-depression, pro-recovery measure. As we have seen, even in the case of the Glass Banking Act of 1933, the search of financial discipline is going nowhere. I think it can be said, by looking exclusively at the legislative heritage of the Roosevelt era, that nothing good could come out of it. We can have now a quantitative look at the economic picture produced by the social struggle of the Roosevelt years.

We can see below a graphic representation of unemployment in the Hoover-Roosevelt New Deal. It is the most compelling illustration of the New Deal’s suppressive effect. Roosevelt succeeded in keeping the unemployment at very high levels. In his book about the Great Depression and the New Deal, Robert P. Murphy looks comparatively at the contemporary situation of the unemployed in Canada. He observes[8] that

during the (peacetime) heyday of the New Deal from 1934 to 1941, U.S. unemployment, on average, was 5.9 points higher than Canada’s. Thus, if one tries to excuse the lingering unemployment of the 1930s on “external shocks” outside of Roosevelt’s control, we must nonetheless conclude that the Canadian government did a better job handling such shocks. (Incidentally, the Canadians did not institute a “Northern New Deal” during the 1930’s.)

Moreover, if we take unemployment as a measure of resource idleness and squandering, rather than a measure of hunger and psychic suffering, then we have to keep in mind that a lot of unemployment was masked by the measures and projects listed above. Higgs argues that, given the work-spreading schemes prevalent in those times, a correct measurement of labor would be taking into account the man-hours worked[9].

It would therefore be interesting to add all the men-hours spent in the make-work schemes to the official unemployment data (while subtracting them from the employment data). How much more would real unemployment be then?

The man-hours thus calculated could be differentiated from official unemployment figures in order to stress the gravity of the squandering that these make-work schemes made of the scarce natural resources and strenuously accumulated capital at such times. Those resources and capital would have otherwise been left to the calculative allocation of the private property order.

Chart no.2: Unemployment and its Trend in the Great Depression. (Data source: Murphy (2009), pp. 99-100.)

To get the government junk-work out of the way Higgs studies the evolution of private nonfarm hours worked in the period. He concludes[10]:

Private nonfarm hours, however, did not exceed their 1929 level until 1942, when Americans were energetically building up the war-supply industries and a gigantic complex of military facilities to accommodate an armed force that eventually exceeded 12 million men and women in uniform. As late as 1939, Roosevelt’s seventh year in the presidency, private nonfarm hours were 16 percent below their total in 1929—and about 21 percent below the trend high-employment level for 1939 (computed on the assumption of a constant rate of growth of such hours between 1929 and 1948). Perhaps no other single comparison expresses so succinctly, so unambiguously, and so irrefutably the New Deal’s failure to bring about full economic recovery. Moreover, in 1939, private nonfarm hours no longer represented nearly 75 percent of the total national hours worked, as they had in 1929, but only 69 percent—surely a move in the wrong direction with regard to restoring the pre-Depression level of economic well-being.

Indeed, the idea that the New Deal wreaked havoc rather than recovery begins to grip[11] the positivistic mind. Harold L. Cole and Lee E. Ohanian, after taking a “theory-free” look at the Great Depression policies observe[12] that

The recovery from the Great Depression was weak despite rapid productivity growth, and was accompanied by significant increases in real wages and prices in several sectors of the economy. A successful theory of the recovery from the Depression should account for persistent low levels of consumption, investment, and employment, the high real wage, and the apparent lack of competition in the labor market. We developed a model with New Deal labor and industrial policies that can account for sectoral high wages, a distorted labor market, and depressed employment, consumption, and investment despite normal productivity.

Then they engage upon building a model —where “[t]ime is discrete and denoted by t = 0, 1, 2, …∞” and “[t]here is no uncertainty,” to start with!— to test whether and to which extent the NIRA and NLRA, with their collective bargaining and cartelization enforcement, brought about a prolongation of the depression. Their

results suggest that New Deal policies are an important contributing factor to the persistence of the Great Depression. The key depressing element behind these policies was not monopoly per se, but rather linking the ability of firms to collude with paying high wages. Our model indicates that these policies reduced consumption, and investment about 14 percent relative to their competitive balanced growth path levels. Thus, the model accounts for about half of the continuation of the Great Depression between 1934 and 1939.

In a recent Wall Street Journal article[13], Cole and Ohanian reaffirm their findings about the New Deal. This time they state that the depression was prolonged with 7 years because of the “bad part of the New Deal.” Thus, rather than bringing recovery, Roosevelt’s bad measures produced the “recession within the depression” of the 1937.

They conclude that “Wholesale government intervention can – and does – deliver the most unintended of consequences.” However, the reforms they propose are not adequate and their articles show that the limited positivistic analysis hamper their further judgment of the “good part of New Deal.” We will see below that the proposed reforms are inadequate.

Although we could not gather the banking and other financial data necessary for extending Rothbard’s thorough analysis of money and banking from the interval 1921-1929 further into Roosevelt’s years, we can see from the graphic below that the Roosevelt era was characterized by unleashed inflation of the money stock (what the Fed now calls monetary base).

Chart no. 3: Money Stock. (Source: U.S. Treasury Department)

The money stock calculated here by the Treasury amounts to gold, silver, minor coin and different types of paper money. While we have a measure of money in circulation, we do not know how much of the money deposited at the treasury were actually used for government transactions and also, we do not know how much was pyramided —in the form of demand deposits, time deposits, deposits of saving-and-loan associations, life insurance surrender liabilities, and other instruments functioning as monetary substitutes— on the sums outside of the treasury and not in circulation. The money stock has evolved from 9 billion dollars in 1932, to 23.8 billion dollars in 1939, a 264% total growth, at 15% annually on average.

The true money supply is difficult to gauge for reasons deeper than lack of banking data. Thus, the confusion introduced gradually between time and demand deposits puts the historian in the difficult position of guessing at the intentions of the actors owning the different types of deposits at banks and other financial institutions.

He cannot know if a person holding a deposit views it as a saving or as holding of cash. Therefore, even if we observe banking contracts and actual practice, until the market demonstrates in action the preference to hold money[14], we cannot presume strict operational knowledge of the volume of money in society.

Despite gold inflows into U.S. and the 69% increase of the dollar definition of gold in 1933, the gold coverage of the above money stock (monetary base) never exceeded 70 percent:

Chart no. 4: Percentage of Gold in Monetary Base. (Source: U.S. Treasury Department)

Below we can see the main indexes of the stock market.

Chart no. 5: Standard and Poors 500 Composite Index. (Source: U.S. Bureau of Economic Analysis)

Historical prices do not serve for theoretical tests but for illustrative purposes. On both graphics, but especially on Standard & Poors one could distinguish between two phases in the New Deal: one of relative struggle, in 1933 and 1934, then the beginning of what could be called a “deflated bubble” and then the crisis of August 1937, marking the beginning of the depression within the depression.

The stock market crash came after several months of struggle between Roosevelt and the Supreme Court. Although it seemed like the Supreme Court defeated the “packing” offensive, in reality the judges became much more lenient (some giving up the struggle altogether and choosing retirement) and began passing Roosevelt’s legislation.

The summer of 1936 was marked by the passing of NLRA (Wagner), which gave renewed power to the unions. Anderson considers that this event, combined with further loss of business confidence lead to retrenchment of private investment and decline of economic activity.

It may be noted that it is much more difficult to see historical traces of the business cycle under all the aforementioned disturbing factors. Rather than ample booms and resounding busts, what we should expect under a situation where monetary expansion is combined with wide regulation and government planning, is a continuous slump. This was Roosevelt’s real deal for America.

Chart no. 6: Dow-Jones. (Source: U.S. Bureau of Economic Analysis)

Where regime uncertainty, credit expansion and economic fascism make private investment retreat from the economy, government takes over. We will look at government depredation of the economy by continuing the analysis[15] done by Rothbard in America’s Great Depression.

New Deal Government Depredation (billions of dollars and percents)

Table no. 1: New Deal Government Depredation. (Source: Bureau of Economic Analysis; Own Calculations.)

Although our calculations do not reach Rothbard’s level of sophistication, one can observe that there is a good approximation of his results for government depredation in the years from 1929 to 1933. Given the extra difficulties imposed by the economic regulations of the era (government controlled prices) on the usual lack of relevance of official statistics —due to biased sampling, aggregation and Keynesian-oriented methodology and concealment—, this confirmation of the trend first highlighted by Rothbard should be considered more than satisfactory.

Chart no. 7: New Deal Government Depredation. (Source: own calculations from Bureau of Economic Analysis data.)

Following this trend, we can see that Roosevelt not only did not reduce the size of Federal and State governments relative to the private sphere, but also increased it significantly. Again, we can distinguish here a first phase of the New Deal, marked by the rampant fascism of the Hundred Days, taking government’s size in 1934 to a record high for the decade.

Then we see a relative decline, coinciding with the inflation of the depressed bubble, from 1935 to 1937. The tax hike operated in the Revenue Act of 1935 does not seem to have lead to a proportional increase of government revenue. After 1937, the New Deal regains its strength, ending the decade in what the advocates of Big Government could consider a resounding success: a doubling of the relative size of government, growing from around an eight part to around a quarter of the private sphere. And, again, these conclusions are drawn from relatively toothless data.

The New Deal was there to stay. Many of the inroads made by government into the American private property order with Roosevelt at the helm left permanent traces. Robert Higgs[16] makes a summary of New Deal’s uninterrupted legacy:

[M]any of the institutional innovations of the 1930s remain embedded in the socioeconomic order today: acreage allotments, price supports, and marketing controls in agriculture, detailed regulation of private securities markets, extensive federal intrusion in union-management relations, enormous governmental lending and insurance activities, the minimum wage, national unemployment insurance, Social Security pensions and welfare payments, production and sale of electrical power by the federal government, fiat money wholly without commodity backing — the list goes on and on.

[1] Higgs (1987).

[2] Flynn (1948), p. 42.

[3] See, for example Cole, Ohanian (2001), p. 13.

[4] The Agricultural Adjustment Act ,

[5] The National Industrial Recovery Act,

[6] Anderson (1979), p. 337.

[7] However, Higgs’ article has tremendous illustrative power. Higgs (1997).

[8] Murphy (2009), pp. 103-104.

[9] Higgs (2009), p. 2.

[10] Higgs (2009), p. 6.

[11] DiLorenzo (2004)

[12] Cole, Ohanian (2001), p. 51.

[13] Cole, Ohanian (2009)

[14] Huerta de Soto (2006), p. 792.

[15] See Rothbard (2000), page 255 and Annex. We have encountered the following difficulties: Government enterprises mixed into private product, subsidies consolidated with government enterprises deficit, interest paid and interest received represented as remainder value. No de-homogenization was performed.

[16] Higgs (1987), p. 159.

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