New Deal or Raw Deal?

Franklin D. Roosevelt is commonly considered one of the greatest presidents in American history. The Roosevelt story goes that in the depths of the Great Depression, amid a timid and unresponsive government, a knight in shining armor rode onto the scene to rescue the downtrodden American people with an unprecedented and enormously effective national response.

Fortunately there are some courageous historians who have begun to poke holes in the Roosevelt myth. Jim Powell wrote FDR’s Folly in 2004. Four years later historian Burton Folsom gave us the subject of this article, New Deal or Raw Deal?.  Folsom’s book is an unrelenting barrage of facts and reality which expose FDR and his New Deal as ineffective at best and riddled with corruption at worst.

Roosevelt was elected president in 1932 at the height of the Great Depression. Unemployment had passed 25 percent in August of that year and Roosevelt offered a different vision for the future than his competitor, President Herbert Hoover.  By 1932, Hoover had achieved an unprecedented level of government interference in the economy. So what was the different vision that Roosevelt offered?

Interestingly Roosevelt ran on a platform of lower spending and less government. In a campaign speech in Pittsburgh, Roosevelt called Hoover’s spending “the most reckless and extravagant past that I have been able to discover in the statistical record of any peacetime government anywhere, any time.” Once he was elected, however, Roosevelt begun enacting the policies that would become the New Deal.

The New Deal is commonly thought of as leveling the playing field between rich and poor, but Folsom’s book shows why this was not the case. The National Recovery Act (NRA) amounted to an authorization of price fixing and meant that “the majority (of businesses) in any industry had government approval and legal force to determine…what wages had to be paid, the number of hours to be worked, and the prices of all products within the industry.”

In theory the government-mandated higher wages would give workers more income and the government-mandated higher prices would prevent “cutthroat competition”. In reality, the wage laws maintained unemployment at a high level while the price laws allowed the largest companies to make it illegal for smaller companies to lower their prices. The leaders of small businesses were then faced with the choice of going out of business if they complied with the NRA, or with going to jail if they didn’t, and both of these scenarios occurred under the NRA. Under Roosevelt, the alleged friend of the little guy, big businesses were given license to collude and drive their smaller competitors out of business.

Another of FDR’s pet programs was the creation of a nationwide minimum wage, universally recognized as a bad idea by anyone who has considered the concept for more than 10 seconds. To show the unintended consequences of minimum wage laws, Folsom relays the story of Willie Lyons, a female elevator operator in Washington D.C. In 1918 the District of Columbia passed a law that required all women to be paid a minimum of $71.50 a month. Lyons’ monthly wages at the Congress Hall Hotel in D.C. were $35 a month and when the government artificially raised the cost to employ her, Lyons lost her job and the hotel hired a man at her former salary of $35 a month. This well-intentioned policy ended up harming the very person it was intended to help.

Fast forward 15 years and FDR’s nationwide minimum wage combined these unforeseen consequences with political corruption. Northern politicians used the occasion to set wages at such a level as to stop the flow of jobs from Northern textiles factories to the South, where labor was cheaper.  As Folsom notes, “The driving force behind the bill was not the working poor…but the highly paid textile workers of New England, who were eager to use the force of government to protect their jobs.”

The situation only got worse for the poor. Folsom points out that Roosevelt’s system of taxation, which relied heavily on excise taxes, shifted much of the tax burden to poor Americans despite the high tax rates for the highest income brackets. Everyday products were made more expensive by these taxes, which drove up the cost of living.

In 1936, Roosevelt was running for reelection and trying to convince the country that, despite the fact that unemployment remained high, he deserved a second term. When the election was over, Roosevelt had defeated Republican Alf Landon and received over 60 percent of the popular vote. This, it would seem, shows how well Roosevelt’s message resonated with the public.

Folsom, however, has a different explanation. He cites many examples of how the administrators of New Deal programs used the funds at their disposal to buy votes for Roosevelt. Some went as far as to tell voters that their benefits from the government would end if they did not support Roosevelt and the Democrats.

One particularly egregious example was the letter received by a Pennsylvanian whose job had been provided by the Works Progress Administration, a federal “make work” program. The letter questioned why she had not contributed the required $28.08 to the county Democratic Campaign Committee and went on to say that, “unless your contribution in the above amount is received promptly it will be necessary to place your name on the list of those who will not be given consideration for any other appointment of the emergency relief work.” This amounted to a threat of supporting the Democrats or being fired.

Folsom’s conclusion is that, to a large degree, Roosevelt and the Democrats used the taxpayers’ money to buy their own votes in the 1936 election. Besides buying elections, FDR also used the IRS to investigate and intimidate anyone who dared to challenge him. This included businessmen, members of the media, other politicians and celebrities. Roosevelt’s goal was to harass and threaten these people into submission. By the middle of his second term Roosevelt had even begun to use these tactics on members of his own party who he believed had not been sufficiently loyal.

In the end Folsom’s analysis concludes that not only were FDR’s programs ineffective and susceptible to corruption, but that the man himself was ineffective and corrupt. Since people today still appeal to the lessons of the 1930s as some alleged proof of the efficacy of large-scale government involvement in the economy, learning the lessons that Folsom gives us is important.

The only negative in this book is Folsom’s incorrect understanding of the Federal Reserve’s role in the Great Depression, which Murray Rothbard and Robert Murphy have exposed in their books.  Even so, I highly recommend this book to anyone seeking a deeper understanding of this period of history.