Shattered Consensus. James Piereson
back to work; nor did he have to worry about environmental regulations or cumbersome permitting rules of the kind that hold up road and bridge building today. Any public works program proposed on the model of Roosevelt’s Works Progress Administration would now have to be tailored to the characteristics of the unemployed in a service economy, to the current regulatory environment, and to the objections of public sector unions.
Some of the most constructive and long-lasting features of the New Deal are those that today’s would-be reformers ignore when calculating its achievements—most particularly, the broad financial reforms that FDR implemented during his first hundred days. He moved quickly in 1933 to address the failures in the financial system that were obvious sources of the continuing deflation and downward spiral in the economy, immediately declaring a bank “holiday” (to stop bank panics) and removing the United States from the gold standard to free the Federal Reserve from its deflationary restrictions. In short order, Congress approved a series of reforms that created a system of deposit insurance, brought more banks under the supervision of the Treasury and the Federal Reserve, established standards of transparency in the public sale of securities, and built a wall of separation between commercial and investment banks in order to curtail the speculation with bank deposits that many saw as a cause of bank failures. Roosevelt also effectively devalued the U.S. dollar in relation to gold, raising the exchange value from $21 to $35 per ounce. In combination, these measures stopped the slide and re-established the banking system on a stronger and more stable foundation. Most of them continue to function today as underpinnings of the financial system (save for the split between commercial and investment banks, which was repealed in 1999).
At the same time, many of the New Deal measures most favored by reformers today were either unhelpful or counterproductive in addressing the economic crisis. FDR’s farm programs, designed to raise prices by cutting agricultural production, may have helped some farmers, but they did not promote farm exports nor did they help consumers with tight family budgets. In a misguided effort to raise prices, New Deal functionaries destroyed meat and produce and took cropland out of production even as hungry Americans stood in bread lines. The National Industrial Recovery Act (NIRA), designed to bring unions and corporations together to set prices, production levels, and working conditions, proved to be a bureaucratic tangle as businessmen tried to use it to guarantee profits, unions to drive up wages, and government officials to expand public power. Through its complex codes, NIRA succeeded not only in raising prices—a dubious achievement—but also in sowing confusion throughout the economy as to what business practices were and were not permitted. It was soon declared unconstitutional by the Supreme Court and FDR never tried to revive it.
The main elements of the so-called Second New Deal—the Social Security Act, the National Labor Relations Act, and the Revenue Act of 1935—added new burdens to business in the form of payroll taxes, higher corporate taxes, and collective bargaining for labor unions. Whatever their long-term benefits, these measures did not improve the climate for investment and job creation in the 1930s. The NLRA, predictably, led to more union organization and to a spike in industrial strikes. The passage of these measures was accompanied by a good deal of antibusiness rhetoric, which was not helpful either. Indeed, the Revenue Act, because it raised the highest marginal tax rate to 78 percent, was sometimes called the “soak-the-rich tax.” When a severe recession followed in 1937 and 1938, sending the unemployment rate from 14 percent to 19 percent, FDR attributed the crisis to a “capital strike” engineered by business leaders exercising “monopoly power.” Such demagoguery may have succeeded as a political strategy in deflecting blame from the administration to the business community, but it failed miserably as an approach to economic growth, as Amity Shlaes argued in The Forgotten Man, her counterestablishment history of the Depression era. Unemployment remained high throughout Roosevelt’s second term, never going below 14 percent until the nation began to mobilize for war in 1941.
The antibusiness rhetoric of the New Dealers had its source in a misguided understanding of the causes of the Depression, which they located in industrial concentration and monopoly and an overproduction of goods that drove down prices after the stock market crash of 1929. Lurking behind all these ills, supposedly, were the rich bankers and industrialists whose speculation and abuse of monopoly power caused the entire system to collapse. But none of these factors, as economists now agree, could have caused a collapse on the scale of the Great Depression, nor could they have accounted for the generalized deflation that occurred. By April 1930, moreover, stocks had regained much of the value that had been lost in the meltdown of the previous October.
The real causes of the Depression are to be found elsewhere, and they are instructive for today’s economic problems. Though economists and historians still debate the subject, several interconnected factors appear to have combined to turn a serious stock market correction in late 1929 into a full-scale depression by 1932: (1) An ill-advised tariff policy passed by Congress in 1930 to protect U.S. manufacturers had the unintended effect of shutting down international trade and U.S. exports. (2) A monetary policy adopted by the Federal Reserve raised the discount rate and allowed the money supply to shrink through 1932 even as the economy faltered. (3) A cascade of bank failures wiped out savings and credit for large swaths of the economy. (4) A mountain of international war debt destabilized exchange rates, undermined the prewar gold standard, and impeded economic growth in debtor countries. These factors worked together in a reinforcing process from 1930 to 1933 to send the world economy into a downward spiral.
The economic collapse was thus accelerated by policy errors made by Congress and especially by monetary authorities that did nothing as the money supply contracted and banks failed. All those involved had failed to take into account and make accommodations for the unprecedented international situation created by the war. Today’s financial authorities, apparently mindful of history’s lessons, seem determined to prevent a replay of the falling dominoes of the 1930s. To the extent we avoid that experience, it will undoubtedly be through the use of monetary levers that were untried, unknown, or unavailable at that time.
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Admirers of the New Deal point to the prosperity of the 1950s and 1960s as evidence that FDR’s reforms, rather than undermining American capitalism, actually smoothed out its rough edges and permitted it to operate more efficiently. FDR himself claimed that his New Deal had saved market capitalism from its own inherent excesses. That is the case he made to critics from the business community during a campaign speech in Chicago on October 14, 1936: “It was this administration which saved the system of private profit and free enterprise after it had been dragged to the brink of ruin by these same leaders who now try to scare you.” Many mainstream economists and historians have elaborated upon FDR’s claims. John Kenneth Galbraith, for example, argued in American Capitalism (1952), The Affluent Society (1958), and The New Industrial State (1967) that the New Deal put into place a modern economy in which large corporations and labor unions control markets and work with government to maintain demand for products and to set wages and prices. Such a system, he contended, was required by technological advances that called for large business enterprises, which in turn needed to be regulated by government in the public interest.
The corporatist ideal, along with a bipartisan foreign policy, was a pillar of the governing consensus during the Eisenhower and Kennedy–Johnson years. Conservative Republicans were sorely disappointed when Eisenhower maintained the essential contours of the New Deal following his landslide election. Richard Nixon also endorsed that consensus, declaring in January 1971 that he was “now a Keynesian in economics.” That year, he removed the dollar from the international gold standard and imposed wage and price controls in the hope of battling inflation. By the mid-1970s, though, it was clear that the policy prescriptions of the New Deal—stimulus packages, loose money, job training programs, bailouts of bankrupt cities and corporations—had failed to stem the accelerating “stagflation.”
The postwar governing consensus was built upon a temporary and artificial situation in which America’s chief competitors in Asia and Europe were on the sidelines as a result of the war. It took at least two decades for those economies to recover (with American aid) to the point where they could compete with American industry in fields like automobiles, steel, and energy. The U.S. economy operated at high levels during the 1950s and 1960s, exporting products around the world and maintaining balance-of-payments