The Corner

Questioning The New Deal

Behind the WSJ firewall, Amity Shlaes has a wonderful piece about the sacred New Deal. An excerpt:

When I went back to study those years for a book, I realized two things. The first was that the picture we received growing up was distorted in a number of important regards. The second was that the old argument about the immorality of scrutinizing the New Deal was counterproductive.

The premier line in the standard history is that Herbert Hoover was a right-winger whose laissez-faire politics helped convert the 1929 Crash into the Great Depression. But a review of the new president’s actions reveals him to be a control freak, an interventionist in spite of himself. Hoover signed the Smoot-Hawley Tariff Act, which worsened a global downturn, even though he had long lived in London and understood better than almost anyone the interconnectedness of markets. He also bullied companies into maintaining high wages and keeping employees on their payrolls when they could ill afford to do so. Perhaps worst of all, he berated the stock market as a speculative sinner even though he knew better. For example, Hoover opposed shorting as a practice, a policy that frightened markets at an especially vulnerable time.

The second standard understanding is that the Brain Trusters were moderate people who drew from American history when they wrote the New Deal. If their philosophies were left wing, then that aspect ought to be treated parenthetically, the attitude was. But the leftishness of the Brain Trust was not parenthetical. It was central.

In the summer of 1927, a group of future New Dealers, mostly junior professors or minor union officials, were received by Stalin for a full six hours when they traveled on a junket to the Soviet Union. Both Stalin’s Russia and Mussolini’s Italy influenced the New Deal enormously. The Brain Trusters were not, for the most part, fascists or communists. They were thoughtful people who wrote in the New Republic. But their ideas were wrong. Their intense romanticization of the concept of the economy of scale ignored the small man. One of the New Dealers from the old Soviet trip, Rex Tugwell, even created his very own version of Animal Farm in Casa Grande, Ariz. As in the Orwell book, the farmers revolted.

The third familiar story line in the received wisdom about the New Deal is that, while it may not have been perfect, it did inspire the American people and tide them over. Here the emphasis is wrong. Roosevelt’s radio voice may have inspired — yes. But the New Deal hurt the economy, and that mattered more. At some points Roosevelt seemed to understand the need to counter deflation. But his method for doing so generated a whole new set of uncertainties. Roosevelt personally experimented with the currency — one day, in bed, he raised the gold price by 21 cents. When Henry Morgenthau, who would shortly become Treasury Secretary, asked him why, Roosevelt said that “it’s a lucky number, because it’s three times seven.” Morgenthau wrote later: “If anybody ever knew how we set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

Really, read the whole thing. 


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