In the quiet morning; there was much despair.
And in the hours that followed no one could repair:
That poor girl...rolled in on a sea of disaster;
rolled out on a mainline rail


The reign of John Maynard Keynes began with a titanic financial crash. Will the Keynesian Era conclude with another cataclysmic collision? Are we right now in the excruciatingly painful throes of passing from one economic epoch to the next?

A More Conventional History of the New Deal and the Great Depression.

From the very first moment I heard Amity Shlaes's provocative Forgotten Man thesis, I reacted to her revisionist assertion with skepticism and trepidation. I compliment her for ingeniously seizing upon an incontrovertible fact of American history: the New Deal failed to generate prosperity and, for eight long years, proved altogether incapable of lifting the United States out of the Great Depression. From that irrefutable, under-appreciated, and timely assertion, however, I fear that Shlaes went on to build a bridge too far, arguing that the New Deal actually exacerbated the Great Depression.

Not surprisingly, The Forgotten Man has set off a firestorm of accusations and recriminations between politicians, talking heads, and pundits. Perhaps most problematic, too much of the chatter seems ignorant of the conventional narrative of the New Deal. Submitted below is an ultra concise, straightforward, and hopefully noncontroversial summary of the events in question, followed by a few terse conclusions, several nagging questions, and a rant.

The Three Phases of the New Deal.

Franklin Roosevelt took office in March of 1933 in the midst of a horrific international financial crisis, which had been gaining steam since the fall of 1929. Although the national economy had showed intermittent signs of hope along the way, the winter of 1932-33 brought a culmination and fateful crossroads to the long downturn: an impending collapse of the banking system.

THE FIRST NEW DEAL. In the face of looming chaos and the potential unraveling of American society, Roosevelt and his "brain trust" acted with jarring alacrity and authority to seize control of the banking, industrial, and agricultural sectors of the American economy. Increasingly certain that the notion of the competitive marketplace had outlived its utility (and was, in fact, the cause of the massive crisis), the Roosevelt administration empowered the government to plan and coordinate the national economy.

During the storied first "Hundred Days" of the Roosevelt presidency, a special session of Congress gleefully agreed to a long list of administration proposals, beginning with emergency banking legislation. As an afterthought, they then added the Glass-Steagall Act, the Federal Deposit Insurance Corporation (FDIC), and the SEC. Along with the rescue and reform of the financial sector, the President urged Congress to establish myriad "alphabet soup" agencies (NRA, PWA, FERA, AAA, TVA, etc.)--granting the New Dealers unprecedented authority to reshape the traditional relationship between government and business.

How utterly epochal was this moment? One commentator observed that this brief period read like the first chapter of Genesis ("and FDR created"), allowing us to imagine the new president moving across the great void and virtually speaking modern government into existence.

How well did it work?

Undeniably, Roosevelt's swift action after the bleak winter of chaos and confusion saved the banking system and staved off national ruin. Moreover, the regulatory regime constructed to manage the financial sector paid off handsomely over the next seventy-odd years--and continues to insulate us in important ways, even today, from a catastrophe strictly analogous to the 1930s.

On the other hand, the administration's expressed goals of dictating national standards for industrial output, prices, and working conditions proved less effective than originally advertised in terms of revitalizing the devastated economy. The initiative to impose production quotas on the agricultural sector raised commodity prices, but it also established the precedent of paying farmers not to farm, displaced legions of tenant families, and oversaw the intentional destruction of millions of edible farm animals during a moment of widespread hunger. And while the public works projects temporarily employed millions of workers, unemployment after two years of the Roosevelt administration remained astronomically high: just over 20 percent.

THE SECOND NEW DEAL. Although disappointed with his initial failure to hoist the economy from the depths of the Depression, FDR could console himself with his unparalleled popularity evidenced by the unprecedented reaffirmation of his party in the midterm elections of 1934. However, even in the midst of that electoral triumph, continuing hardship and charismatic potential rivals forced him to keep a wary eye to his political left.

What we now call the "Second New Deal" commenced in 1935, shifting administration priorities away from the frustratingly intractable business side of the recovery to a new emphasis on so-called economic security for American workers. Influenced by a diverse collection of voices (Keynes among them) acting independently but coalescing around a new economic spirit of the age, the Roosevelt administration shifted focus to the demand side of the economy. The new imperative: produce purchasing power among consumers by redistributing wealth and raising real wages.

Once again, compliant Democratic majorities on Capitol Hill proved happily responsive to the agenda of the president whom they now called the "Champ." Propitiating the populist vexation with the class of wealthy Americans FDR would soon be calling "economic royalists," the 74th Congress levied a confiscatory tax on large fortunes and corporate profits (the Revenue Act of 1935). The New Dealers also created the Rural Electrification Agency to bring electric power to isolated farm families, struck a decisive blow for unionization, collective bargaining, and higher wages with the Wagner Act, and finally found the right recipe for sustainable work relief (the Works Progress Administration).

Of course, the centerpiece of the Second New Deal, and the most concrete element of the Roosevelt legacy, was the Social Security Act of 1935, which created a massive national safety net for ordinary citizens and marked the beginning of the so-called American welfare state.

How successful was the Second New Deal?

In terms of solving the Great Depression, the new emphasis achieved modest success in temporarily blunting unemployment. The jobless rate dipped to 14 percent in 1936. However, as Roosevelt attempted to reduce the federal deficit by spending less on farm subsidies and work relief, just as the Social Security program introduced a payroll tax on most workers, the economy slowed dramatically and unemployment jumped back up to 20 percent by the end of 1937.

Significant to this narrative, the 1936 publication of John Maynard Keynes's revolutionary monograph challenged a basic economic principle of the day and influenced the New Dealers. Keynes postulated that government should intercept a downturn in the business cycle by injecting money into the economy and igniting and multiplying a "natural" recovery. The emerging theory encouraged the Roosevelt administration to push for more spending to combat the "slump of 1937," allocating billions to new work projects and renewed farm relief. After the intervention, the economy recovered relatively in 1938 to its 1936 levels.

"Keynesian economics" was not a revelation to Roosevelt in 1937; the British scholar had been a long-distance confidant of the administration almost from the beginning. Nevertheless, after two failed attempts at restructuring the economy, combined with Keynes's timely assertion of a systematic economic theology in 1936, the events of 1937 marked a dramatic tipping point for the administration. The slump and recovery hammered home an important lesson for Roosevelt and his advisers: in times of great distress, massive appropriation of federal dollars would stimulate the economy. After years of pragmatic experimentation with all manner of solutions, 1938 marks the moment when we can confidently characterize Roosevelt as "Keynesian."

On a deeper level, the Second New Deal also transformed American political culture. Our view of fair working conditions changed dramatically during the mid-1930s. Modern rules regarding child labor, the necessity of a minimum wage, and the forty-hour workweek are all products of the Roosevelt approach. More broadly, and perhaps most significantly, the Social Security Act institutionalized the notion that the government maintains ultimate responsibility for the welfare and economic security of individual citizens.

THE unofficial THIRD ACT OF THE NEW DEAL.

After four years of nearly unchecked executive power and his triumphant reelection in 1936, the "Champ" absorbed several debilitating blows during his second term. In addition to the inconvenient economic downturn in 1937, FDR audaciously challenged the Supreme Court. He came away with a split decision, losing the notorious "court-packing" fight in Congress--but succeeding in as much as he intimidated the surviving jurists just enough to save his Second New Deal from judicial nullification. More detrimental politically, FDR waged an unsuccessful campaign to cleanse his own ranks of non-believers. Frustrated with a less responsive 75th Congress, the President publicly entreated loyal Democrats to root out conservative obstructionists within the party, most of whom hailed from the South, and replace them with solution-oriented liberals. The midterm elections of 1938 failed to "purge" the renegade Democrats. The era of Roosevelt invincibility was over, and a long-running "post-1938" political impasse commenced.

With a loose coalition of southern Democrats and Republicans in Congress now thwarting the domestic initiatives of the White House, and the President increasingly intent on preparing the nation for the impending world war, the New Deal receded gradually from center stage. During the 1930s, the administration had happily exploited popular revulsion with the business community. During this third phase of the Roosevelt presidency, the "class warfare" rhetoric and other radical elements of the intoxicating early days of New Dealism gave way to a more mature relationship with the private sector. In essence, the war years necessitated a rapprochement between the federal government and big business.

Rehabilitated, chastened, and unleashed, American business thrilled a newly fascinated and supportive nation with stunning achievements in wartime manufacturing, full employment, and a skyrocketing GDP. Massive expenditures of federal funds resurrected traditional working sectors and created entirely new industrial communities built around war production. At the stubborn insistence of the administration, business finally submitted to the notion of unionization as a fait accompli and reluctantly accepted organized labor as a third partner in the retooled economy. Magically, business, labor, and government all prospered in this symbiotic commensalism as the nation came together to gird itself for a righteous war for freedom.

The government became a monster--albeit a generally benevolent one. The budget more than quintupled between 1940 and 1943 and continued to rise through 1945. Meanwhile, business and labor also emerged as popularly beloved institutions of American capitalism, as GDP more than doubled during the war and stood poised to ascend at an ever more astounding rate once the conflagration ceased. As the fight overseas raged on, even in the midst of rationing and scarcity, American workers and families enjoyed a level of prosperity unknown for more than a decade. Somewhere in the midst of the fog of war, the Great Depression evaporated into the atmosphere never to be heard from again.

What happened? What can we deduce from this set of facts?

As an experiment in Keynesian economics, it is currently popular to assert that the War experience proved that massive government spending defeated the Great Depression. While true on its face, that facile conclusion, especially when applied to our present situation, merely leads to more difficult questions.

How colossal would the massive stimulus actually need to be to redirect our failing economy? Crafting a current measure proportional to our wartime spending might require as much as five trillion dollars in stimulative appropriations ($5,000,000,000,000)--or one-third of our current GDP. Based on this calculation, many intellectuals castigate the most recent 800-billion-dollar stimulus as annoyingly insignificant.

Are you ready for a second stimulus? And a third? How about a fourth?

What brand of national emergency would precipitate such extraordinarily gargantuan intervention?

And, by the way, what role should defense spending play in this "inducement to investment"?

Even more troublesome, the contemporary full-blown Keynesian prescription also assumes that current conditions are relatively similar to the 1940s. That is, once we run up massive deficits to leverage our way into a spending-driven cycle of prosperity, we are well-positioned to expand ourselves back into the black (or close to it) as we did during the post-war decades. That is no modest assumption.

To be fair, our simplistic popular association that imagines Keynesian principles as a license to achieve permanent prosperity through perpetual government stimulus and massive public debts and deficits breaks faith with Keynes's General Theory. Keynes, who died in 1946, never posited that government could guarantee unlimited abundance. However, the fundamental flaw with the New Deal-slash-Keynesian hybrid lies with the misleading assurance that government can ensure life without misfortune. Keynes himself made no such promise.

Perpetual deficits and an out-sized national debt strikes me as an unsustainable proposition. Doesn't our profligate spending and inability to balance our budgets become an intractable problem at some juncture? Doesn't Mr. Keynes's magic carpet ride actually have to end someday?

Where are we now? The Rant:

Part of me wonders whether a Great Crash and a Second Great Depression is not, perversely, the only ultimate solution to our massive addiction to seventy years of unrestrained government intervention in the economy. I worry that our seventy-year Keynesian interlude must come to a close at some point in the near future regardless of what we do here.

For me, the question is hard crash or soft crash. My most sanguine hope is for a soft crash-landing in which we walk away chastened and repentant. Of course, that scenario stretches the limits of human nature. A more likely outcome is that we buy ourselves some extra time to further ignore our new reality and blithely go on with business as usual until we come to the next emergency. Why? We are addicted to stimulus. As a body politic, we have no tolerance for anything less than perennial expansion.

I am reminded of Thomas Jefferson's portentous observation regarding slavery during the Missouri Crisis of 1820:

"We have the wolf by the ears, and we can neither hold him, nor safely let him go."

Will it take a cataclysm on the scale of our enormously destructive Civil War to break our economic addiction?

The Keynesian episode reads alarmingly like a classic fable. Man is presented with a miraculous tool for good, if used in moderation. Instead of using the great gift sparingly, man happily abuses the new device until it is exhausted. If the fable has a happy ending, some benevolent force comes and puts the mechanism back in the box and instructs man that he will need to persevere without the gift. If the fable has a harder less therapeutic conclusion, then the largesse becomes the primary implement for destruction of man at his own hands.

End of Rant.

One last thought (just in case the world doesn't end):

As for the assertion that we are all socialists now, the history of the New Deal offers us important lessons in our current time of troubles. New Deal regulation arrived as a needed corrective to the barely regulated 1920s. Large elements of the regulatory apparatus proved constructive, and remnants of that regime survive as a lasting and positive legacy in the modern era. Moreover, this model for reform will prove instructive as we emerge from an extended period of deregulation.

On the other hand, the general attempts at central planning during the New Deal failed. While we make a huge mistake imbuing market forces with mystical omnipotence to solve all our human problems, we also err when we delude ourselves into believing the market is optional. The reality of the marketplace is relentless, omnipresent, and presents us with myriad contingencies impossible to anticipate.

Finally, it is worth noting that a more mature, less invasive, more business-friendly version of the New Deal proved better equipped at achieving a return to prosperity. In terms of recovery, Roosevelt accomplished more after he lost his ability to dictate policy to Congress and found himself forced to compromise the most radical tenets of the early Popular Front ethos. Class warfare and the tendency to demonize business proved politically expedient early on, but ultimate success on the macro level necessitated a more focused and less revolutionary approach.

Our current president might do well to note that oftentimes less is more.