Did FDR End the Depression?

From The Wall Street Journal
By Burton Folsom, Jr. and Anita Folsom

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let's start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the "right to a useful and remunerative job" provided by the federal government if necessary.

Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR's ideas as the best way to achieve full employment after the war.

Congress—both chambers with Democratic majorities—responded by just saying "no." No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

Corporate tax rates were trimmed and FDR's "excess profits" tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945.

Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call "supply-side economics." If the tax bill "has the effect which it is hoped it will have," George said, "it will so stimulate the expansion of business as to bring in a greater total revenue."

He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.

Congress substituted the tonic of freedom for FDR's New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

Burt Folsom, a professor of history at Hillsdale College, is the author of "New Deal or Raw Deal?" (Simon & Schuster, 2008). Mrs. Folsom is director of Hillsdale College's annual Free Market Forum.

FDR and Obama: Their First Hundred Days

From American Spectator
By Burton Folsom, Jr.

On April 29, the U.S. will have survived the first hundred days of President Barack Obama. Of course, unemployment is up and the stock market is down, but the president's optimism is still unbounded. Mr.Obama's staff is encouraging writers to find parallels to FDR and his first hundred days as president 75 years ago during the Great Depression. Let's take the challenge: Here are three points of similarity between the two presidencies.

First, President Obama, like FDR, has used the economic emergency to pass massive spending bills. For example, Obama warned of dire consequences if Congress failed to pass his 1,100 page emergency "stimulus bill" of $787 billion. Congressmen had no time to reflect on the bill, or even read it. They passed a bill that would spend $25,000 per second every second of the year 2009--without serious debate. In doing that, President Obama was taking a page from FDR's emergency banking bill, which the House passed, sight unseen, after only thirty-eight minutes of debate. As Congressman Robert Luce of Massachusetts responded, "judgment must be waived… argument must be silenced, we should take matters without criticism lest we may do harm by delay." The atmosphere in the House in 2009 was almost identical.

Second, President Obama, like FDR, has already begun centralizing power in the executive branch. For example, Obama is already trying to move the Census Bureau into the executive department, from the Commerce Department, to control the counting of the U. S. population for the 2010 census -- which will help to determine congressional representation and federal funding. In FDR's first hundred days, he moved to control the currency -- the banking bill gave him control over the movement of gold, and the Thomas Amendment to the Agricultural Adjustment Act allowed the president to issue greenbacks or tinker with gold and silver, as he saw fit, to promote inflation.

Third, President Obama is following FDR by vilifying businessmen. On TV, we see Mr. Obama pointing his finger at bankers, cajoling executives at credit card companies, and regularly denouncing "Wall Street greed." In doing so, Obama has followed FDR's script. In his first day in office, Roosevelt set the tone for his relentless attacks on businessmen: "rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence.… The money changers have fled from their high seats in the temple of our civilization."

What is disturbing about these parallels to FDR's first hundred days is to contemplate the next 2,500 days of that bygone era. Where did the cries of emergency, the centralization of power, and the vilification of business take the nation? The answer is class warfare, a deeply divided country, and 18 percent unemployment. The Great Depression of the 1930s lingered -- and lingered, and lingered. It could do nothing else. Massive federal spending merely transferred money from the wallets of average Americans to the hands of federal bureaucrats. As taxes rose to a top marginal rate of 79 percent under FDR (Obama has already promised to raise the current marginal rate on top incomes), entrepreneurs had no incentive to take what capital they had left and start new businesses, or expand existing ones. Uncle Sam wanted almost four out of five of their last earned dollars for taxes. Class warfare, and the redistribution of income, had knocked the creativity out of a generation of entrepreneurs -- some of whom in the 1920s had either invented or expanded the production of radios, talking movies, air-conditioners, zippers, scotch tape, and even sliced bread.

In running for re-election in 1936, FDR said, "They [businessmen] are unanimous in their hate for me -- and I welcome their hatred." He had found, as his speechwriter Ray Moley pointed out, that "every time they [businessmen] made an attack on him… he gained votes and that the result of carrying on his sort of warfare was to bring the people to his support." In other words, FDR had discovered a striking paradox: Attacking businessmen, and raising their taxes, prevented the Great Depression from ending, but it won votes from Americans who came to believe that businessmen were their enemies and FDR was their "fireside chat" friend.

As in the case of FDR, President Obama will soon approach a fork in the road -- does he cut tax rates on income and capital gains, and give incentives to entrepreneurs to invest, or does he continue to vilify businessmen and risk another Great Depression?

Burton Folsom, Jr. is professor of history at Hillsdale College and author of New Deal or Raw Deal? (Simon & Schuster, 2008).