FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression

Published by EH.NET (March 2004)

Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression. New York: Crown Forum, 2003. xvi + 336 pp. $27.50 (cloth), ISBN: 0-7615-0165-7.

Reviewed for EH.NET by Ellis W. Hawley, Department of History, University of Iowa.

In FDR’s Folly Jim Powell, editor of Laissez Faire Books and a senior fellow at the Cato Institute, resurrects the libertarian critique of the New Deal initially expounded by the period’s business fundamentalists, conservative economists, and American Liberty Leaguers. The work is also in line with the libertarian revisionism articulated by Murray Rothbard in the 1960s, and its recovery arguments closely resemble those subsequently made by historians Gary Dean Best, Robert Higgs, and Gene Smiley. More than they, however, Powell pulls together and draws upon recent studies highlighting the New Deal’s contradictions and political abuses, recent work stressing its unintended consequences, and especially the relatively recent and growing literature on regulatory costs produced by Chicago School and public choice economists. His intended audience, moreover, is less one of specialists in the period than of current policy makers who lack the information to critique and reject the New Deal model. The work is engagingly written for general readers and should provide a variety of “talking points” for conservative political activists.

Powell begins with three introductory chapters, in which he provides sketches of leading New Dealers, embraces Milton Friedman’s monetary theory of the Depression’s origins, and depicts President Herbert Hoover’s interventionism as making things worse. He concludes with chapters on the New Deal’s legacy and implications for current policy. And in the fifteen intervening chapters he examines the New Deal in action, organizing the discussion by policy areas and arguing that in each area efforts to bring recovery through reform “backfired” and brought continued depression instead. Business policy vacillated from fostering cartels to disruptive harassment, both becoming obstacles to renewed investment. Labor and farm policies fostered arrangements preventing the market system from working. Financial policy perpetuated a defective banking system, hampered potential investors, and facilitated monetary mismanagement. Welfare, public works, and tax policies deprived the private sector of resources that could have been better utilized there, and constitutional innovation worked to reduce the liberty needed for economic revival. In developing his case, Powell pushes the ideas of “crowding out” and “regime uncertainty” farther than some economists would go. But he offers compelling evidence for what most historians of the period would now concede, namely that New Deal recovery efforts failed and often had perverse consequences.

Powell is less persuasive, however, in arguing that smaller and less intrusive government was the appropriate route to speedy recovery. To bolster this argument he cites the experiences of 1893-1894 and 1920-1921. But he never addresses a considerable economic literature concerned with industrial development and attributing “delayed recovery” to systemic structural impediments that had not existed earlier. Michael Bernstein’s The Great Depression, for example, is cited only to document criticism of the National Recovery Administration, and Joseph Schumpeter only as a critic of “business bashing.” One is never convinced that the system had not changed in ways that precluded speedy recovery through private-sector adjustments or that the vicious cycle at work in early 1933 might not have continued downward and become even more socially destructive in the absence of a New Deal. More recent experience with the austerity and laissez-faire policies imposed upon sick economies abroad also makes one wonder about their curative powers.

Unpersuasive as well is Powell’s depiction of the political and intellectual contexts in which the New Deal acted. He insists that there was much room for wisdom or folly, since there were virtually no political constraints on Roosevelt’s policy choices. In doing so, he largely ignores what other historians have had to say about ideological commitments, administrative resources, constitutional considerations, a changing political base, and the contemporary state of economic knowledge. In addition, he does not fully appreciate the revulsion against and fear of market forces that gripped the United States and other industrial nations at the time, and he says little about the extent to which perceptions of a natural business cycle had by 1929 given way to perceptions that it was unnecessary. The New Deal recovery measures emerged from these contexts as well as from Roosevelt’s prejudices and misperceptions, and they make it unlikely that libertarian prescriptions could have been followed, either by him or by anyone else who could have been elected president.

As Powell sees it, FDR’s greatest folly was to seek recovery by undertaking reform, which, he argues, was needless and often detrimental. In support of this he cites recent analyses claiming that investment institutions performed better before being reformed, that economic progress was actually retarded in the Tennessee Valley and other areas allegedly benefiting from new infrastructures, that regulatory expansion discouraged needed innovation and underwrote inefficiency, and that collective bargaining, fair labor standards, and parity price floors were harmful to those most in need, especially the African-American minority. Yet the system as reformed, partly by the New Deal and partly by a carry-over of wartime measures, did perform wonderfully well in the two decades after World War II, a fact that Powell tends to skip over rather than seek to explain. In that period the business community finally adjusted to institutional reforms, an enlarged public sector, and altered “social contracts” that much of America believed to be necessary steps toward a more humane and equitable order. Hence, Roosevelt’s real “folly” may have been his undue delay in finding an appropriate temporary offset for the reform-induced but temporary decline in private investment.

In his concluding chapter, Powell draws “lessons” from the New Deal’s recovery failures, arguing that an understanding of them should help current and future policy makers to avoid burdensome and “soak-the-rich” taxes, public-sector “jobs” programs that inevitably turn into vote buying, laws that prevent needed price and wage adjustments, measures restricting freedom of trade, and monetary authorities with undue discretionary powers. One suspects, however, that he has produced mostly a treatise for the converted, not one that will lead to many political conversions or extensive historical revision. It may provide a history useful to conservative argumentation and the strengthening of conservative folk wisdom but, given its weaknesses, seems unlikely to be very persuasive or influential in other circles.

Ellis W. Hawley is Professor of History Emeritus at the University of Iowa. He recently published “The Great Depression in the Midwest,” in Robert S. McElvaine, editor, Encyclopedia of the Great Depression (Macmillan, 2004), 619-625, and is currently working on a book tentatively entitled “Herbert Hoover and the Search for a Nonstatist Progressivism, 1914-1933.”