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

Table of Contents

For Marisa, Madeline, Frank,
Justin, Kristin, and Rosalynd

PRAISE FOR FDRS FOLLY

The next time economic cataclysm looms, leaders should read Jim Powells book.

National Review

[Powell] has demonstrated that (a) not only did Roosevelt not end the Depression, but (b) by incompetent measures, he prolonged it.

Chicago Sun-Times

Only now has a book been written in language that non-economists can understand that argues persuasively that the policies of the Roosevelt administration actually prolonged the Depression and made it worse. That book is FDRsFolly by Jim Powell. It is very readable, factual, and insightful.... This book is an education in itself.

Thomas Sowell, syndicated columnist

Admirers of FDR credit his New Deal with restoring the American economy after the disastrous contraction of 192933. Truth to tellas Powell demonstrates without a shadow of a doubtthe New Deal hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government. Powells analysis is thoroughly documented, relying on an impressive variety of popular and academic literature, both contemporary and historical.

Milton Friedman,
Nobel Prizewinning economist

There is a critical and often forgotten difference between disaster and tragedy. Disasters happen to us all, no matter what we do. We bring tragedies upon ourselves by hubris. The Depression of the 1930s would have been a brief disaster if it hadnt been for the national tragedy of the New Deal. Jim Powell has proven this.

P. J. ORourke,
author of Parliament of Whores and Eat the Rich

Powell debunks most arguments advanced by such FDR hagiographers as James MacGregor Burns and Arthur M. Schlesinger Jr.

The Hill

The material laid out in this book desperately needs to be available to a much wider audience than the ranks of professional economists and economic historians, if policy confusion similar to the New Deal is to be avoided in the future.

James M. Buchanan,
Nobel Prizewinning economist

[FDRs Folly] fills an important gap in the literature critical of FDRs domestic program.... Powell is simply excellent on the reasons for the depth and persistence of the Depression.... Powells book, which has been needed for decades now, provides an excellent overview of a period in American history regarding which the conventional wisdom could not be more wrong.

The American Conservative

I found Jim Powells book fascinating. I think he has written an important story, one that definitely needs telling.

Thomas Fleming,
bestselling author of The New Dealers War

A prosecution brief against the New Deal... [Powell] is out to indict. But it counts for a great deal that he is successful. And it counts for even more that he is pressing a case that has rarely been presented to the general public by hagiographic historians, professional and amateur.

The American Spectator

INTRODUCTION

THE GREAT DEPRESSION has had an immense influence on our thinking, particularly about ways to handle an economic crisis, yet we know surprisingly little about it. Most historians have focused on chronicling Franklin D. Roosevelts charismatic personality, his brilliance as a strategist and communicator, the dramatic One Hundred Days, the First New Deal, Second New Deal, the court-packing plan, and other political aspects of the story. Comparatively little attention has been paid to the effects of the New Deal.

In recent decades, however, many economists have tried to determine whether New Deal policies contributed to recovery or prolonged the depression. The most troubling issue has been the persistence of high unemployment throughout the New Deal period. From 1934 to 1940, the median annual unemployment rate was 17.2 percent.1 At no point during the 1930s did unemployment go below 14 percent. Even in 1941, amidst the military buildup for World War II, 9.9 percent of American workers were unemployed. Living standards remained depressed until after the war.2

While there was episodic recovery between 1933 and 1937, the 1937 peak was lower than the previous peak (1929), a highly unusual occurrence. Progress has been the norm. In addition, the 1937 peak was followed by a crash. As Nobel laureate Milton Friedman observed, this was the only occasion in our record when one deep depression followed immediately on the heels of another.3

Scholarly investigators have raised some provocative questions. For instance, why did New Dealers make it more expensive for employers to hire people? Why did FDRs Justice Department file some 150 lawsuits threatening big employers? Why did New Deal policies discourage private investment without which private employment was unlikely to revive? Why so many policies to push up the cost of living? Why did New Dealers destroy food while people went hungry? To what extent did New Deal labor laws penalize blacks? Why did New Dealers break up the strongest banks? Why were Americans made more vulnerable to disastrous human error at the Federal Reserve? Why didnt New Deal securities laws help investors do better? Why didnt New Deal public works projects bring about a recovery? Why was so much New Deal relief spending channeled away from the poorest people? Why did the Tennessee Valley Authority become a drag on the Tennessee Valley?

Curiously, although the Great Depression was probably the most important economic event in twentieth-century American history, Stanford Universitys David M. Kennedy seems to be the only major political historian who has mentioned any of the recent findings. Whatever it was, he wrote in his Pulitzer Prizewinning Freedom from Fear (1999), the New Deal was not a recovery program, or at any rate not an effective one. 4

Its true the Great Depression was an international phenomenondepression in Germany, for instance, made increasing numbers of desperate people search for scapegoats and support Adolf Hitler, a lunatic who couldnt get anywhere politically just a few years earlier when the country was still prosperous. But compared to the United States, as economic historian Lester V. Chandler observed, in most countries the depression was less deep and prolonged. 5 Regardless whether the depression originated in the United States or Europe, there is considerable evidence that New Deal policies prolonged high unemployment.

FDR didnt do anything about a major cause of 90 percent of the bank failures, namely, state and federal unit banking laws. These limited banks to a single office, preventing them from diversifying their loan portfolios and their source of funds. Unit banks were highly vulnerable to failure when local business conditions were bad, because all their loans were to local people, many of whom were in default, and all their deposits came from local people who were withdrawing their money. Canada, which permitted nationwide branch banking, didnt have a single bank failure during the Great Depression.

FDRs major banking reform, the second Glass-Steagall Act, actually weakened the banking system by breaking up the strongest banks to separate commercial banking from investment banking. Universal banks (which served depositors and did securities underwriting) were much stronger than banks pursuing only one of these activities, very few universal banks failed, and securities underwritten by universal banks were less risky. Almost every historian has praised FDRs other major financial reform, establishing the Securities and Exchange Commission to supervise the registration of new securities and the operation of securities markets, but in terms of rate of return, investors were no better off than they were in the 1920s, before the Securities and Exchange Commission came along.