How This Happened
For years, many of us puzzled about how something so stupid and destructive as the New Deal could have happened. The stock market crashed because it was overinflated. That's nothing new. History is filled with credit bubbles that pop. Resources are reallocated to reflect economic reality and we move on.
The New Deal was different. It actually began under Hoover, who initiated new spending programs, jobs programs, and tried to inflate the money supply and bail out the banks. He was blasted by FDR for his big government policies, and FDR won the election. Once in power, FDR went nuts, instituting a program of central planning that combined features of the Soviet and Fascist models.
It was one idiotic program after another. They tried to raise wages when they should have fallen. They tried to save banks that should have collapsed. They destroyed resources when they were most needed. They encouraged spending when people should have been saving. They smashed the dollar at a time when it needed to be shored up. They cartelized business when competition was most necessary.
What were the results? Economic growth went nowhere between 1933 and 1939, with real gross domestic product per adult still 27 percent below trend at the end. Per capita GDP was lower in 1939 than in 1929. Unemployment was at 17.2 percent in 1939. This was actually higher than it was in 1931. This is despite 100 percent increases in monetary expansion. Taxes had tripled. Employing people became ever more expensive due to unions and national income guarantees.
Every time the economy would bottom out and genuine recovery would begin, policy would knock it back down again. Other seeming upturns were entirely artificial: make-work instead of real work, for example. Regimentation was everywhere so that business couldn't compete, farmers were destroying livestock and crops on command, and dissidents were being ferreted out through police-state tactics.
In other words, the whole project was a massive dud. It turned what might have been a short downturn into a decade-long national calamity, the biggest cost of which was freedom itself. And then as a coverup for the calamity, there was war. At last FDR found some use for those unemployed workers: send them to kill and be killed at taxpayer expense. As for wartime price controls and nationalization, it was the New Deal by other means.
(For a full account, with all the detail, in scintillating prose, see Flynn's Roosevelt Myth.)
Was it some sort of national insanity?
No, it was a power grab, and the current political moment shows precisely how this happens. A small group of elites, cut off from the broader reality, decides to finagle the system to serve itself and its friends in the short term while forgetting the big picture and the long term. Sensible people try to point out obvious facts, but their voices are drowned out.
But none of this happens without some philosophical rationale. Even before J.M. Keynes came along to give bad economic ideas a scientific gloss, the notion that government could gin up the economy with spending and inflation was pervasive. Laissez-faire economic theories had already fallen out of favor with the elites who controlled the universities, print houses, and government agencies.
Many nutty ideas were in the air. It's remarkable to see how many pro-Fascist books, for example, were in print in the 1920s and '30s. It was widely assumed that the future of the good society was bound up with the idea of "economic planning." This was an interesting phrase. It covered all forms of socialism plus the interventionist state. "Planning" was the intellectual fashion, and there were very few dissidents.
Once the crisis hit, the intellectual reality became the political reality. (Higgs describes the process in Crisis and Leviathan.)
Now that we are living amidst this, it is easier to come to terms with how the New Deal came about. It makes those in the know feel completely helpless. We look at what is happening to bank reserves and we know what is coming. When the economy recovers — even if only cosmetically — and lending starts again, the internal dynamic of the fractional-reserve system will come into operation. We could be facing inflation at 10 percent or 20 percent or even much higher, depending on how spending psychology plays itself out.
Then we listen to speeches by the president-elect, who is going on about the great stimulus package he is going to push through Congress. It's like listening to one quack doctor propose bleeding the patient even as the last quack doctor who bled the patient is packing his bags to leave. You want to shout: is there a real doctor in the house? But it seems like no one is listening.
What's striking here is how the historians are the ones with power right now. Bush has gone nuts with inflation and intervention as a way of avoiding Hoover's fate, even though the actual historical record (versus the historians' fantasies) shows that Hoover was the first New Dealer. Meanwhile, the Obama clique hopes to recreate the FDR disaster by following his plan detail by detail, even though the plan was stupid and didn't work.
To watch all this happening is like watching a slow-moving train headed over a cliff. The problem is that the engineers have ear plugs in and blinders on.
Will this go on for ten years like the last time? Will it end in World War III, as if following some historical script? Is it possible that we will go the way of Germany in the 1920s, straight into the abyss of hyperinflation and into the hands of a ghastly dictator? It is unwise to rule it out.
And yet, I'm not that pessimistic. It is extremely crucial to realize that there is a difference this time. In the 1930s, technological limits put severe restrictions on information delivery. Government propaganda easily dominated the culture. All of that has changed. Despite everything, people simply do not trust the government as they once did. Obama will enjoy a short honeymoon, but it will be over by summer.
What is still missing is one critical thing: a culture-wide love of liberty that is capable of intimidating and beating back the rogue regime. The conditions are right for this to actually happen, and to reverse the direction of politics today. But it will require all our efforts. Fortunately, everyone has the opportunity today to make a difference.
I hope my own book will help make a difference.
The last words in Ludwig von Mises's book Socialism bear repeating:
Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle.