Don't Trust the Brain Trust
The ghost of FDR is everywhere, haunting both Washington and New York. The terrible trouble is that the minds in power have confused an economic wrecker with an angel of mercy. They are following his confusions and prescriptions day to day in an attempted repeat of the longest economic calamity in modern American history.
They have looked at the history of the New Deal and completely misunderstood it, believing the civics-book claptrap about how FDR saved us from the Depression, whereas the fact is that FDR's theories and policies lengthened and deepened it to the point that the only way out that the Roosevelt administration saw was war.
The great theoretical error of the New Dealers was to confuse the symptom of low prices with the causes of the economic downturn. The real problem was that prices were massively inflated before the stock-market crash of 1929. The correction had to occur and would have occurred peacefully, if not wholly painlessly, had the government not intervened.
No government in all of human history that has waged war on prices has won. The Great Depression is exhibit A.
First there was Hoover with his attack on the "bitter-end liquidationists," whose advice he summarily rejected. Instead he increased taxes, regulated against short selling, attempted to expand liquidity and the money supply, attempted to maintain existing wage rates, extended loans via government, and bailed out debtors with bankruptcy laws. For more on Hoover's antimarket program, see Rothbard's America's Great Depression.
Roosevelt took office and extended this program, while rhetorically claiming that it was the free-market policy of the Hoover administration that failed. Today we see Bush's attack on speculators and the mediawide attempt to claim that the meltdown is caused by unregulated markets run amok. No doubt the next president, whoever he may be, will continue this crusade against markets, pretending as if the Fed and the Bush administration haven't been trying antimarket means of rescue for fully two years, with each attempt backfiring.
But now let's look forward to the next step in the war on falling prices in the 1930s. FDR took office under the promise that he would curb the big spending of the Hoover administration. The tune changed once he took office. Like Hoover before him, he denounced the rich and powerful speculators, bankers, and corporations he blamed for bad economic times. Even as he was saying these things, he called together the people he regarded as the most powerful and important corporate, banking, and labor interests — together with a gaggle of professors from Columbia — and essentially asked them what they wanted to get the economy going again.
This was the Brain Trust that set the pattern for all of Washington's activities from then to the present day. John T. Flynn, in his masterful book The Roosevelt Myth, described the first round of the New Deal as
that 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.
What did the elites gathered around FDR demand? Higher prices (of course), uniform industrial codes on labor and prices, production controls, an end to competition from below, security for labor unions, guaranteed credits, import tariffs — and also the police power they needed to enforce all this. The model here was Mussolini's Italy, which was regarded at the time as an ideal system of industrial management. Of course, antitrust laws were shelved as the government itself set out to create as many trusts as possible.
What came out of these meetings was the all-around industrial planning fiasco called the National Industrial Recovery Act, which created the National Recovery Administration. The head was former draft administrator General Hugh Johnson, who brought to the effort every propaganda trick he had learned from his kidnapping years. He began with a central plan of wages, working hours, prices, and production quotas. He went on the air, to the papers, to billboards, movies, and everything else to whip up a frenzy.
There was a symbol of compliance: The Blue Eagle. FDR said on the radio that "soldiers wear a bright badge to be sure that comrades do not fire on comrades. Those who cooperate in this program must know each other at a glance. That bright badge is the Blue Eagle." And, added Johnson, may "God have mercy on anyone who attempts to trifle with that bird."
And you know what? It is a complete disgrace that business supported it all — for a while.
Flynn tells of police raids of factories, as workers were lined up and interrogated to make sure that they weren't working overtime and weren't accepting less than the government-approved minimum. Consumers were arrested for paying less than the approved minimum prices. A tailor named Jack Magid in New Jersey was arrested and jailed for charging 35 cents instead of 40 cents to press a pair of pants. In time, the NRA became unenforceable, as black markets sprung up in every industry. The crackdown became worse, with nighttime raids on factories, and bureaucrats chopping down doors with axes to make sure that no one was sewing clothes. The NRA staff ballooned from 60 employees to 6,000 at the national level.
The entire thing became a war on production to benefit a handful of elites, all in the name of keeping prices up, all on the profound misunderstanding that boosting prices would boost production, whereas the opposite was true. Finally the Supreme Court came to the rescue and declared the whole Soviet-like scheme unconstitutional, but, by that time, it was clear that it was unworkable and doomed to failure.
At the very same time, other sectors such as banking and agriculture were being administered by other destructive schemes, all based on economic error. The result was fantastic waste, disastrous attacks on freedom and productivity, a regimentation of the entire country under a dictator, and a prolongation of the Depression, which went on and on.
No matter how many disasters FDR created — and it was nonstop — and no matter how much his ridiculous "rabbits from the hat" were exposed as economically harebrained, with every new bureau, every new law, every new initiative, the economy continued to sink.
The New Deal is a paradigmatic case of how to turn a downturn into a depression. That US leaders regard this as a model to follow does not speak very well of their economic literacy, and it doesn't bode well for our future.
On the other hand, if you want to see how to handle a crisis, consider the Panic of 1819. Never heard of it? That's because it came and went, and that's because the government did nothing about it.