Roosevelt Myth - John T. Flynn

The Forgotten Depression

A month after Roosevelt's second inauguration many business men were fearful we might see a runaway boom. The war clouds had darkened over Europe. European money was in flight to America. Great Britain had just launched a $7,500,000,000) armament program and industry here was expecting to get a good slice of this war business. Our Neutrality Law did not prohibit armament sales abroad in peace-time. And Marriner Eccles and other administration officials were troubling their minds lest the rising armament industry unsettle our economy.

Throughout the year 1937 the President was busy with his misbegotten war on the Supreme Court. But there was at least a hearty draught of good cheer in the rosy reports about business that came to him from the New Deal statisticians. Despite all the fatalities amongst his glittering plans it did look to him as if his great task rescuing the nation from the depression—was about to be completed.

For a brief moment his mind wandered away from the tricky schemes of the reformers for remaking America. There were but three years to go before his White House lease would end. If he could have the nation soundly back on its feet by the end of 1938, then his chief task would be to strengthen the few institutions he had established and which had withstood the storm. He stopped talking about things like the NRA and about planning. Now he became interested in the little business man, in the enforcement of the anti-trust laws. Only a couple of years before he was delivering lectures to the newsmen with a wall chart and a pointer like a real professor, explaining how corporations and business men must be allowed to get together and write their own tickets about circumnavigating the anti-trust laws. Now he was telling the folks that he could not enforce the anti-trust laws, which the wicked Supreme Court had restored by annulling NRA, because the courts wouldn't let him. Back in 1934 the Federal Trade Commission had attacked the steel barons for their monopolistic practices. Roosevelt had rebuked the Commissioners, put them in the doghouse and cut their appropriations to the bone. Aside from this, die big thing was to balance the budget.

By August, however, while he was yet smarting under the Court defeat, signs began to appear that the vitality was oozing out of the boom. People were still talking about recovery, but the thing that makes for solid recovery in the capitalist system—the revival of real investment—had failed to materialize. The building industry was in the doldrums. Private financing was still on a hopelessly inadequate level. Much publicity was given to the large stock and bond issues. But they were issues to replace old stocks and bonds that were being recalled and did not represent any flow of new money into business.

In 1932 there were 11,385,000 unemployed. But employment improved all during the President's first term. By June, 1937 unemployment as down to 4,464,000, which was still too large. And it never got any better. It got worse and by November, 1937, there were 7,000,000 people out of work. As early as July men were asking: "What has become of the boom?" The Treasury boasted that relief payments were less than in the same period the preceding year. But this was not so. The Treasury made a practice of keeping tricky books and producing phony results. It had merely shifted relief payments to other accounts. They were, in fact, larger than the year before. Stock prices began to decline and by September the unpleasant prospect could be no longer hidden. Daniel Roper, Secretary of Commerce, was putting out rosy statements about business. But the facts had seeped into the White House and on October 8, 1937, Jim Farley talked to Roosevelt about business. Roosevelt pooh-poohed it. Everything was all right, he said. It was all a move by business to discredit his policies.

This was characteristic of Roosevelt. Any unfavorable turn he attributed to a secret plot of his enemies. Any criticism of his measures he put down to some secret hatred of him personally. He was still bitter about the Court defeat. He sneered at the Senate and House. He told Farley the trouble with them, including the Vice-President, was that their thinking was still antiquated. They didn't see the importance of minimum wage and maximum hour legislation. This was a curious comment from the man who forced the Congress shortly after his first election to ditch minimum wage and maximum hour legislation which the Senate had already passed. There were some other matters, none of outstanding importance, which he wanted to see through and then, he told Farley, "then he would just ride along."

At a cabinet meeting later the same day Dan Roper undertook to say that business was all right. Roosevelt jumped on him. "Dan," he said, "you have just got to stop issuing these Hooverish statements." Roosevelt didn't disagree with Roper. He just felt the situation should be ignored and that things would right themselves.

"Everything will work out all right if we just sit tight and keep quiet," he ended. The next day he told Farley there was altogether too much talking and too many press conferences. "I'm going to put the lid on," he said.

But by the end of October, the grim facts about conditions could no longer be ignored. The market crashed and administration critics were saying this was the end of the New Deal. In November, at a cabinet meeting, Miss Perkins brought up a report just prepared by her statistician, Isador Lubin. It showed employment was off two percent, she said, when it ought to be up two percent. The heavy industries were behind and sales following the automobile show were disappointing. She feared things might be dangerous in view of conditions. Henry Morgenthau, the Milquetoast of the cabinet, got the courage to speak up. He said business was complaining that the capital gains and undistributed profits taxes were impairing recovery. Then he dared to say: "I think it would be heartening for you to show how far better off we are today."

Roosevelt shut him up with a rude rebuff: "Oh, for God's sake, Henry! Do you want me to read the record again?"

Poor Henry reddened as Roosevelt glowered at him amidst an embarrassing silence. Farley spoke up. "Boss," he said, "I think the situation would be helped if you would say something that would alleviate the fears in business. Frankly, I think you should make a quieting statement."

Other cabinet officers—Woodring and Wallace—expressed the same views. But Roosevelt was angry. He blamed the depression on Wall Street. Then he burst out:

"I get all kinds of criticisms and complaints about the economic situation, but few people come into me with any concrete suggestions as to how the situation can be alleviated. It's easy enough to criticize, but it's another thing to help."

Here was the man who had blasted Hoover so unmercifully when it was Hoover's depression. Now there was a Roosevelt depression after he had spent 17 billion dollars. And he didn't like even to be told of it. He denied it at first. Then he snapped:

"I am fully conscious of the situation which exists. I have been studying it for a long time. And I know who's responsible for it. Business, particularly the banking business, has ganged up on me."

The grim specter of disintegrating business continued to haunt the cabinet meetings and to make discussion with Roosevelt difficult. Morgenthau was convinced the country was heading for another depression. After his first rebuff, he shrank from the subject. But on November 7 he wrote a letter to Roosevelt saying plainly we were moving into a depression. That night he telephoned the President and had what he describes as "a grim conversation." Roosevelt flew into a rage. He *old Henry he knew "a wise old bird" who told him business was deliberately causing the depression in order to hold a pistol at his head and force a retreat from the New Deal.

At a cabinet meeting next day Roosevelt brought the subject up himself. He told the cabinet about Henry's letter. He grew angry and said: "I'm sick and tired of being told by the cabinet, by Henry and everybody else what's the matter with the country and nobody suggests what I should do."

This was indeed an extraordinary statement. Only a little over a year before he had been elected by the most amazing majority ever given a President upon the theory that he was the one man who knew what to do. And here he was now trapped in the mysterious tangles of a depression and nobody would tell him what to do about it. If there was one thing had been settled in his mind it was that he, above all men, knew what to do about it. Actually he had solved the depression. He had driven it from the land. He was in the act of putting on a few extra finishing touches to the great edifice of recovery and, lo! here is that Old Debbil Depression snoopin' 'round the White House and all the little men in the cabinet frightened to death and nobody will tell the great Depression Killer what to do about it. Apparently the depression hadn't been killed. It had just been drugged, just flattened out with 17 billion dollars' worth of knockout drops. Now in spite of everything, the damned thing was opening its eyes, breathing, even snorting again, coming to life.

Could it be that all that magic medicine he had administered was no good—just a quack pain-killer?

When the President uttered his doleful complaint there was an ominous silence around the cabinet board. As Henry Morgenthau relates it, he, the meek and humble shadow of the Great Man, took his courage in his hands and, like an aroused bunny, looked the bull dog in the face. He said:

"You can do something about it. You can do something about the railroads. You can do something about housing. Above all, you can do something to reassure business."

Then he waited for the walls to fall in. They didn't, so he went on: "What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?"

Roosevelt muttered that he had told them that again and again.

"All right," said Henry, "tell them for the fifteenth time."

Jim Farley added: "That's what they want to know."

Even Henry Wallace seconded the motion.

So Roosevelt decided to appease business. A few days later Henry Morgenthau was slated to make a speech before the National Academy of Political Science. A Morgan partner was on either side of him and spread out around the numerous tables was the elite of American business. And Henry told them. He told them the New Deal wanted to see capital go into production and private business expand. And then he used a sentence embodying an idea which never yet had gotten any real welcome in the President's head. Henry said:

"We believe that much of the remaining unemployment will disappear if private capital funds are increasingly employed in productive enterprise. We believe that one of the most important ways of achieving these ends at this time is to continue progress toward a balance of the federal budget."

This sounded terribly like Mr. Hoover or Mr. Ogden Mills or Mr. Landon. Yet the whole theme of Mr. Roosevelt's New Deal had been war on business. It was a Holy War. And Roosevelt and the men around him took a delight in picturing business itself as evil and profit as criminal. Now Morgenthau was sent as the emissary of the President to deliver this belated appeal to business. The poor creature was horrified at the response. The audience first tittered and then guffawed out loud. To Oliphant, Henry's croaking New Deal Treasury legal adviser, this proved the whole New Deal case. It showed "the hopelessness of working with them."

After all, it was a little funny and no one can blame the diners for laughing. The budget was running in the red at the time to the tune of $300,000,000 a month.

The Roosevelt technique of trouncing the business man was resumed. Assistant Attorney-General Jackson and Secretary Harold Ickes in December made speeches inspired by the President raising the old ghost of the 60 families who haunt America with their controls. In January, John D. Biggers staggered the administration with his report after a survey that there were 10 million out of work. Soon it would be 11,800,000—more than were unemployed when Roosevelt was elected in 1932.

Pessimism spread through the cabinet. Farley wrote in his diary:

"The days that are to follow, in my judgment, will be more important to the President than the days after the first inauguration. At that time he was trying to get us out of the depression (of Hoover) and now we are in a period that will be blamed on this administration and its policies."

The dark realities of the country had sunk deeply into Roosevelt's mind now. There were just a year and six months before a Democratic convention would meet to pick his successor. All that gaudy edifice of recovery of which he was the be-medaled architect was crumbling around him. One thing was certain. The Second New Deal was a flop. The First New Deal had been abandoned, as we have seen, immediately after his inauguration. A wholly new approach and a completely unheralded series of devices were put together to the roll of the drums and the blaring of the trumpets. This was the Second New Deal. One by one all of its parts had been discarded save a few well-meaning but quite ineffectual social reforms.

The President had settled down to a realization that after all priming the pump—spending billions—had by itself done the job and he hoped to skate along on that to the end of his term. But now even that had failed. Despite the billions and the debt, the depression was back. And it was not a new depression. It was the old one which had not been driven away but merely hidden behind a curtain of 15 billion dollars of new government debt. And, worst of all, he did not have a single new idea that he could use. He actually faced at this moment the appalling prospect, after all the ballyhoo, of going out of office in a depression as great as the one he found in 1932.

The prospect was humiliating in the extreme, especially to a man whose vanity had allowed him to be blown up into such a giant depression-killer.

On January 16, 1938, he and poor Henry Morgenthau sat down to a sad repast. Roosevelt told him "the next two years don't count—they are already water over the dam." Then he revealed the extent of his plans—they would have to step up spending, forget about balancing the budget and get along with a two or three billion dollar a year deficit for two years. Then a conservative would come into office. That administration would do what Roosevelt had been promising he would do—quit government spending. And then the whole thing would go down in a big crash. At that point, they would have to yell for Roosevelt and Morgenthau to come back and get them out of the hole. The amazing feature of this strange confidence which Morgenthau has reported is this. Roosevelt and Morgenthau were already in a hole—the kind of hole the next administration would be in. Nobody had to call them in now—they were in. And they had not the foggiest idea what to do about getting out of the hole they were in, except to spend. Morgenthau concluded from this that Roosevelt had put out of his mind any thought of a third term. It is possible that he had.

Roosevelt was now in the center of a tug-of-war with the spenders like Harry Hopkins, Aubrey Williams, Leon Henderson and Rex Tugwell on one side and Henry Morgenthau, the frightened spokesman for the conservatives on the other. Farley reports that he had a talk on the subject with Roosevelt on March 28, 1938. It is of the first importance as revealing the precise problem that Roosevelt faced and how he solved it.

He told Farley he would have "to go in for pump-priming or relief." Farley agreed. But then Roosevelt confessed to a difficulty little understood at the time, or since. What could he spend on? That was the problem. There is only a limited number of things on which the federal government can spend. This grows out of the character of the federal system. The federal government can build schools, hospitals, roads, institutions of all sorts. But they are built in cities, counties, states and the activities which go on in these buildings are within the jurisdiction of the states. The states have to pay the teachers or nurses and staffs, have to support and maintain the roads and so on. The federal government can spend money on agricultural experimentation, on scientific research, on national parks, on power dams, etc. But in the end the outlays on these things are limited.

The one big thing the federal government can spend money on is the army and navy. Roosevelt explained to Farley that he could not spend on local projects because the states and cities did not want any more buildings and institutions which they would have to support. They were having trouble enough paying the bills of those already built. Roosevelt revealed to Farley that many WPA projects approved by the government were abandoned because the states and cities could not raise the money to support them. He had to spend but what could he spend on? The 1938 Congressional elections and Roosevelt's purge were on and of course Harry Hopkins was dishing it out as fast as he could without very much regard to utility or even decency. That was to meet a political emergency and couldn't go on indefinitely. And the whole problem was becoming complicated by the fact that inside his own official family the pressure for balancing the budget was growing embarrassing.

However, the spenders put on a vigorous winter drive and as Roosevelt went to Warm Springs, Morgenthau went to Sea Island, Georgia to work out a plan for balancing the budget. Around April 10, Roosevelt was back in Washington and Henry had a long talk with him. It was, he confesses mournfully, "a long and unhappy talk" with Roosevelt and Hopkins. Poor Henry's battle was lost. He found that the spenders had won. They had all their plans made. They had consulted no one in the cabinet, neither the Treasury nor the Director of the Budget. Secretary Ickes was to coax states and cities to borrow more. Nathan Straus was to double housing loans. They were to start a great transcontinental motor road. Morgenthau told Roosevelt the program frightened him. Immediately after Roosevelt disclosed his plans to the cabinet, Henry interrupted to say tax revenues would fall by 900 millions and the President's plans would increase the deficit to three and a half billion. The figures shocked the party leaders.

Morgenthau was so depressed that next day he told the President he "was seriously thinking of quitting." Roosevelt reproached him; refused to listen to his resignation and Henry left in a miserable state of mind.

Actually Henry didn't know the half of it. The country had now really reached a greater crisis than in 1933. The public debt, which was 22 billion when Roosevelt took office—almost all a heritage of World War I—was now 37 billion. Taxes were more than doubled.

The President had a war on against the conservatives in his party and his own cabinet was split and angry. Unemployment was several thousand more than it was in October, 1932. Roosevelt knew now he was in a crisis. And he had at his disposal nothing to fight it with save a weapon—government spending—which had failed and which he felt now was a palliative and not a cure. He knew that the means of spending open to him, for the reasons explained above, were hopelessly inadequate. Yet he was now convinced for reasons which we shall see soon that he must not merely spend, but must spend two and three times as much as he had been spending. Would the country take it? He believed that the alternative was a crash of as great proportions as in 1933 and this meant, after all the wreaths that had been put upon his brow, he would go out of office in disgrace.

Roosevelt's position at this moment was singularly embarrassing. He had denounced Hoover as a spendthrift, for refusing to cut taxes and for his failure to balance the budget. Then he had proceeded to outspend Hoover, to raise taxes, to plunge the government into heavy debts, and now things were at least as badly off as when he hurled those challenges and charges at Hoover. It would be interesting to know what thoughts shouldered themselves through that carefree and comfortable mind as he saw himself now sinking under the weight of the crumbling economic system.

To a man of more humility the suspicion might have inserted itself into the secret precincts of his mind that, after all, he did not fully understand the vast organism he had set out to repair and that it might be he was a tinkerer rather than a mechanic, not so much a physician as a quack. There might have been, indeed, at least a little touch of understanding of the tremendous problem that confronted Hoover who faced the disaster at its top violence rather than after it had spent its terrible force. Certainly voices began now to speak up—voices that were lyrical about Roosevelt in 1933 and 1934—to suggest that after all Hoover may have known what he was doing, that here, nine years after the depression began and after the accidental irritants had been to some extent removed by time and gravity, the fundamental condition of the country was no further advanced than it was at the end of Hoover's three-year struggle with the disaster and that it would be very much worse but for the spending of billions of deficit government money on relief—the very thing Roosevelt himself had denounced as so shocking.

The depression which assaulted our unprepared society in 1929 was by no means a mysterious phenomenon to those who had given any attention to the more or less new studies in the subject of the business cycle. It was, first of all and essentially, one of those cyclical disturbances common to the system of private enterprise. That economic system has in it certain defects that expose it at intervals to certain maladjustments. And this was one of those intervals. Had it been no more than this it could have been checked and reversed in two or three years. But this cyclical depression was aggravated by additional irritants:

  1. The banking system had been gravely weakened by a group of abuses, some of which arose out of the cupidity of some bankers and others out of ignorance.
  2. A wild orgy of speculation had intruded into the system stimulated by a group of bad practices in the investment banking field.
  3. A depression in Europe arising out of special causes there had produced the most serious repercussions here.

The great, central consequence of these several disturbances was to check and then almost halt completely the flow of savings into investment. All economists now know what few, apparently, knew then—that in the capitalist system, power begins in the payments made by employers to workers and others in the process of producing goods. And this must be constantly freshened by an uninterrupted flow of savings into investment—the creation of new enterprises and the expansion of old ones. If this flow of savings into investment slows down the whole economic system slows down. If it is checked severely the whole economic system goes into a collapse.

Now whatever one may think of Hoover, he at least understood this. And whatever one may think of Roosevelt, he did not have the foggiest idea of this subject. President Hoover while Secretary of Commerce had promoted a series of studies into this subject of the business cycle. The studies were made by the National Bureau of Economic Research and fortunately were directed by Wesley C. Mitchell, of Columbia University, a pioneer in stimulating research into the business cycle and the sources and behavior of national income. The results of these studies appeared in several volumes and were widely discussed at the time.

When the depression appeared, Hoover, aware of the latest available authoritative opinion on this subject, knew well that the great central problem was to reactivate the economic system by restoring conditions under which savings and bank credit would begin to flow once again into private investment. There was not too much he could do about the European situation, but there was something he could do about the banks. And there was something could be done about the correction of the whole machinery of speculation. In addition to this, there were the purely human ravages of the depression arising out of the unemployment of so many people.

The banking problem consisted in saving the banks which were threatened with destruction and in correcting the banking system, first to restore confidence in the banks and second to prevent a recurrence of the disaster. The speculative mania had been corrected, but many of the destructive tools that had been employed in the speculative markets still existed, ready to the hand of any unconscionable operator who wished to use them; and throughout Hoover's term one of these—the ruthless operation of gamblers in the stock market with the dangerous weapon of short selling—continued to add at intervals spectacular crashes in the market which intensified the declining confidence of the people.

Hoover therefore urged a reform in the banking structure and, when the situation grew worse, established the Reconstruction Finance Corporation to aid banks threatened with runs and disaster. He provoked that investigation of the speculative markets which functioned until Roosevelt came into office and which most uninformed people imagine was set in motion by Roosevelt.

Hoover stood fast upon a group of propositions. For one, he insisted that the government expenses should be cut and he never faltered in this demand. Second, he demanded that Congress should balance the budget, and not expose the nation's credit to the hazards of the depression. Third, he insisted that aid to the distressed was primarily the function of the states and local communities as well as private organizations. The states and local governments should provide the funds. But he urged that the Reconstruction Finance Corporation should aid in this by lending federal money to the states upon the security of state bonds. Fourth, he believed that the federal government should stimulate the recovery of the economic system by expenditures on public works, but that these must be essential public works—roads, dams, necessary public buildings, etc. For that purpose, almost as soon as the depression assumed threatening proportions, he urged Congress to plan a program of public works amounting to $600,000,000, roads' construction of $75,000,000, the Colorado Dam at $65,000,000, river and harbors at $150,000,000.

Actually he was a pioneer in proposing government intervention in the correction of cyclical economic disturbances. He proposed that the governments should accumulate public works and improvements during periods of prosperity in order not to accentuate its boom proportions and that these improvements should be launched at the appearance of a depression.

But Hoover had against him, in addition to those natural, international and social disturbances, an additional force, namely a Democratic House of Representatives which set itself with relentless purpose against everything he attempted to do from 1930 on. It had a vested interest in the depression. The depression seemed to come to it as a gift from heaven. And as the campaign for the presidency got under way in its early stages in 1931, there was nothing that could have delivered a more staggering blow to its hopes than the success of Hoover's plans for stemming the tide.

The Democratic leadership and Roosevelt himself, when he became the candidate, kept the air hot with denunciations of Hoover's "failure to balance the budget," his "plunging the nation into debt," his mounting taxes and rising expenditures. Roosevelt called him "the greatest spendthrift in history," spoke of his "multiplication or useless and oppressive bureaus," his "failure to deal with the banking collapses" and finally "his callousness to human suffering and the lot of the unemployed." While the Democrats were damning him for his extravagances at the very time when he refused to be drawn into extravagances, the Democratic House passed a bill appropriating $1,500,000,000 for old-fashioned pork-barrel outlays.

Roosevelt's collection of expletives picturing Hoover as the spender, the plunger, the debt-maker, the bureau builder and so on have been recalled endlessly. However, when Roosevelt came into power he proceeded to do all these things—to spend billions, to get these billions by increasing the public debt, to create bureau upon bureau and generally to do all those things he had denounced in Hoover without the slightest foundation for the charges. The nation had indeed gone into debt because in the depression taxes had fallen critically. Hoover had indeed spent a great deal but never so much as Roosevelt was demanding he should spend. But whatever Hoover did, this much must be said; it was done in conformity with a definite and compact theory of the cause and cure of depressions. And I think it must now be admitted that had he had a Congress in sympathy with his own theories the economic system could have been rescued from its doldrums without all that appalling train of consequences which flowed from Roosevelt's policies. There would, of course, have been much to do to put the economic system in perfectly good health and no one knew that better than Hoover.

And it is entirely possible that no one knew less about that subject than Roosevelt. It would seem that the most unthinking admirer would concede this in the presence of the fact that after six years of extravagance, deficits and debt, of so many wild schemes which had to be abandoned as failures, Roosevelt should find himself in 1938 with 11,800,000 unemployed on his hands, business still showing no spark of recovery and his whole cabinet split, angry and surly.

He had charged ahead and around, like an amateur soldier at a riot, pushing and hauling and driving in every direction, without realizing quite what he was doing. Yet out of his numerous sallies a fairly clear pattern of behavior began to appear. It was always easy to sell him a plan that involved giving away government money. It was always easy to interest him in a plan which would confer some special benefit upon some special class in the population in exchange for their votes. He was sure to be interested in any scheme that had the appearance of novelty and he would seize quickly upon a plan that would startle and excite people by its theatrical qualities.

That these several projects should be in eternal hostility to each other was of no moment. As a social physician he gave to his patient eagerly one pill for diarrhea and another for constipation, one solution for high blood pressure and another for low blood pressure, one to produce fever and one to allay it, stimulants and sedatives, prophylactics and poisons, each eagerly adopted on the suggestion of some quack with a theory to exploit or an organized group to benefit or delight. This was Roosevelt. And it landed him in 1938 back pretty much where he began and without a single compound left in his little satchel of remedies save spending and more spending.

But how would he spend and on what? Bridges, roads, a few more dams? These would consume a few billions at most. On what, then, could it be? He already had a definite idea in his mind on what it would be. He had denounced Hoover, among other things, for spending so much on the military establishment. He had warned that if the Republicans were not stopped, they would soon expose the people to the burden of "a billion dollars a year on the military and naval establishment." Now, looking up at the world from the hole in which he found himself, he had to swallow all that too. Half thinking aloud in a chat with Farley he said "The danger of war with Japan will naturally cause an increase in our armaments program, which cannot be avoided." He had only recently warned Americans against those politicians who would tell them that a military industry would produce work for the people and profits for business. But it would be hard, he had said at Chautauqua only two years before "for Americans to look beyond, to realize the inevitable penalties, the inevitable day of reckoning that comes from a false prosperity." Yet now he was playing with that very war motif.

But something new had happened to his mind of which his cabinet officers knew nothing. A new theory had danced across his desk—a sparkling, captivating theory—which he was to seize and hug to his heart like a man in the water whose strength is spent and who suddenly finds a powerful and lusty swimmer at his side.

Before we have a look at this brilliant idea, there was one more problem Roosevelt faced in 1938—the approaching Congressional elections.