The academic legend of Keynesian economics is that Franklin Roosevelt was its first and premier practitioner who saved the nation’s economy through its judicious ministrations during the The Great Depression. This theory of America’s economic history is at best hagiographic and at worst malevolent voodoo.
David Stockman has emerged in the aftermath of the 2008 economic collapse of the US as an elder statesman of traditional economic ideas which affirm the need for market discipline of the economy, the maladies and dangers of crony capitalism, and the necessity for fiscal sobriety, all of which have been entirely absent under the kleptocracies of George Bush and Barack Obama and their bankster handlers.
In a remarkable chapter of his book, The Great Deformation, Stockman lays waste to the naïve notions that Roosevelt was a Keynesian, or that his policies had any material effect on resuscitating the American economy from its severe contraction following the excesses of the 1920s. Others have led the way in this analysis but Stockman brings a larger and more sweeping narrative to the era of the Great Depression.
To understand the buildup to the 1929 collapse, Stockman notes that America’s unprecedented economic growth from 1914-1929 rested upon the spoils of victory of World War 1 which started on the farms which fed Europe and other parts of the world when war ravaged Europeans were unable to produce agriculturally. After the war, American aid was marshaled to feed Europe until its farms could return to self sufficiency, thus giving American farmers a huge bonus from 1914-1921.
America became the great creditor not only as banker for the war, but also as an exporting dynamo whose manufacturers loaned their customers the money to buy their goods. But the easy money of Benjamin Strong gave way to parsimony starting in 1928, eventually leading to collapse of foreign markets – the source of the great economic boom - to say nothing of domestic ones, including Wall Street stock exchanges.
America suddenly found itself with way too much industrial capacity and mal-investment in need of liquidation as it was no longer economically viable. But to add insult to injury, Herbert Hoover signed the Smoot Hawley bill as a protectionist measure in the belief that it would protect jobs and wages.
The measure was brought to a head by the disappearance of gold as a means of international trade settlement, leaving huge imbalances in currency valuations, further disrupting trade. The hapless Hoover's support of the Smoot Hawley Tariffs may have befriended his industrialist cronies, but screwed the average American citizen who was left unemployed by his and his successor’s economic malfeasance.
Stockman does not discuss the trail Hoover blazed for Roosevelt who simply carried on where the former left off. Roosevelt’s aides readily acknowledged that the new president simply expanded on the groundwork of the statist Hoover. When Stockman notes that Hoover was a diehard fan of free enterprise, he fails to observe that Hoover was in the business of bailing out his cronies and fellow travelers. He intervened to prop up soured investments when in fact he should have let them clear.
In spite of Hoover’s gross malpractice and bloated government, Stockman demonstrates that the economy had decisively turned the corner in July of 1932 and had nowhere else to turn but up. Unfortunately, Americans and business owners became extremely uneasy with Roosevelt even as he swept into office in a landslide, parroting in contempt conservative ideals which he planned to jettison as soon as he entered office.
From November 1932 until March 1933, the economy stalled as apprehensions about Roosevelt’s inflationary policies took hold. Stockman does an excellent job in describing the true nature of the banking crisis as one which Roosevelt instigated through his willful and treacherous silence about his administration’s strategy for dealing with the mess created by the Federal Reserve in the late 1920s to 1933, and not helped by Hoover's dramatic interventions.
The banking failures represented a small portion of the banking system’s assets and were confined largely to rural banks which had speculated recklessly during the farm boom, and to small regional banks which also squandered capital and prudence in ill-starred schemes. Even the upstart and large Bank of the United States failed without engendering systemic collapse.
FDR initiated his famous bank holiday as a smoke and mirrors charade which had no net effect on the banking recovery, which started the previous year, other than to retard it and engender fear. Over 90% of the banks closed were reopened and the ones which failed would have failed any way.
Finally, Stockman does a great number on the FDR-as-Keynesian myth. He shows that FDR’s policies were more akin to a mish-mash of dilettantism and pure economic quackery than thoughtful policy strategy, including FDR’s lucky number selection of the price of gold which brought significant and unneeded inflation.
Roosevelt enlarged the federal government, but its take of GNP was still under 10% at the end of the 1930s. His first budget director recommended cuts in federal government salaries and other expenses, hardly a Keynesian notion. His grand experiments with the WPA and PWA were mostly electioneering vehicles which ended in scandal when it was reported that poor workers' meager salaries were being panhandled by FDR’s lieutenants for New Deal politicians' political campaigns in 1938.
Stockman fails to note the heavy taxes Roosevelt inaugurated which put the economy in a tailspin in 1937. Again, high taxes for a frail economy do not follow Keynesian prescriptions. The economy’s GNP would not match that of 1929 until around 1941 or so – a ringing damnation of FDR’s utter failure to bring about economic rejuvenation. The evidence is clear that the economy was recovering in spite of FDR’s hodge podge of voodoo economics.
The main implication of Stockman’s analysis is that all of the politicians claiming to channel FDR during the economic meltdown of 2007/2008 were channeling a fraud who did not even practice the Keynesianism they so worshipped.
Simple ideas attract simple minds. Keynesianism is a simple idea.
New Deal Myths of Recovery (Chapter 8), The Great Deformation, David Stockman, 2013
Copyright 2013 Tony Bonn. All rights reserved.