In Nothing to Fear, New York Times assistant editor Adam Cohen has given us a passionate, even eloquent history of Franklin Delano Roosevelt’s Hundred Days and the launch of the New Deal. He captures the colorful personalities and legislative battles that transformed America into a welfare state. 

Cohen presents the traditional New Deal heroic narrative, following the example of James MacGregor Burns, Arthur M. Schlesinger Jr., Frank Freidel, Kenneth S. Davis, Ted Morgan, and hundreds of other biographers and political historians. Like them, Cohen relies on memoirs, correspondence, diaries, journals, speeches, and legislative histories. Such sources tell what the characters did and what they intended, but they are wholly inadequate in explaining the economic impact of New Deal policies. And understanding these consequences is crucial today because the New Deal debate is about whether and to what extent FDR’s example offers insights for helping the American economy recover from its present crisis.

It is no surprise that economists have produced a substantial body of empirical literature on the economic legacy of the New Deal. The Great Depression was probably the most important economic event in American history. Yet I know of only one major political historian who has cited any of this research: Stanford’s David M. Kennedy in his Pulitzer Prize-winning book Freedom From Fear: The American People in Depression and War (1999). This suggests extraordinary parochialism, a reluctance among biographers and political historians to look outside their field when relevant evidence is available, especially considering that some of this research was published a half-century ago.

Cohen notes that the Securities Act of 1933 was aimed at “dishonest issuers of stock.” (He does not make clear why existing laws against fraud, specifically state “pie-in-the-sky” laws, were inadequate.) He seems to accept the popular idea that dishonesty played a major role in the stock market crash of 1929. Yet Nobel Laureate George Stigler and others have shown that the average rate of return from new stock issues was approximately the same before and after the enactment of New Deal securities laws. Either the laws were ineffective at rooting out fraud, or the amount of fraud compared to the total value of stocks traded was insignificant.

The main reason people lost money in the stock market was not in fact fraud. Rather, stock prices went down principally in response to Federal Reserve efforts to curb speculation. Unit banking laws contributed to bank failures by preventing them from opening branch offices to diversify deposit bases and loan portfolios. 

Cohen also applauds FDR’s “sweeping vision” for the creation of the Tennessee Valley Authority. He accepts the official mantra that the TVA provided a “yardstick” for judging the performance of private power-generating companies. Some yardstick: Cohen neglects to mention that the TVA is America’s biggest monopoly, exempt from hundreds of taxes, federal, state, and local laws and regulations. 

He commends the good intention of the TVA “to provide low-cost public power and improve conditions in one of the poorest regions in the country.” But the TVA, armed with the power of eminent domain, expelled more than 15,000 people from their homes (black sharecroppers got nothing) and then flooded some 750,000 acres (more land than there is in Rhode Island). Moreover, the TVA sold electricity that was subsidized by the 98 percent of American taxpayers who didn’t live in the Tennessee Valley. A major study by William W. Chandler, The Myth of TVA: Conservation and Development in the Tennessee Valley, 1933-1983, showed that in terms of economic growth and income, southerners who received TVA-subsidized electricity lagged behind those who did not.

Cohen also praises the Agricultural Adjustment Act for destroying crops, raising farm prices and farm incomes. Yet he ignores the effect it had on the three-quarters of Americans who were not farmers: they were consumers, millions of them poor, who had to lay out more money for food and clothing. (Cotton was among the crops destroyed.) Nor does Cohen acknowledge that from the beginning farm subsidies always went disproportionately to big farms, since the subsidies were paid on a per acre basis. He does not seem to consider how FDR’s National Recovery Administration adversely affected farmers by establishing cartels that fixed prices above market levels, requiring farmers to pay more for the supplies they needed.

FDR’s Secretary of Agriculture Henry Wallace, Cohen writes, wanted to “slow the flight of farmers from the land” by keeping people in farming, thus preserving the rural way of life. But one of the key problems in America was that there were too many farmers. During the 19th century, a big percentage of immigrants had become farmers, and cultivated acreage soared. American agriculture expanded even more when World War I disrupted European farming. After the war, European agriculture revived and caused considerable excess capacity. More and more people concluded that they would be better off in manufacturing or services. Improved agricultural practices made it possible for fewer farmers to produce all the food that was needed, and the number of farmers continued to decline. FDR’s farm programs served to delay inevitable market adjustments and sustain unwanted farm surpluses. As Cohen admits, many farmers became addicted to federal subsidies, and this has persisted up to the present time.

Cohen praises New Deal public-works projects for creating “real jobs” that did socially useful things. But they weren’t real jobs because they weren’t self-sustaining. They didn’t create wealth. They were dependent on tax revenue from the private sector that was creating all the wealth. Large numbers of those New Deal jobs, especially the leaf-raking variety, didn’t help people improve their skills for the private sector either. One might counter that there are many real jobs in the government sector, but America already had millions of those. The critical challenge of the 1930s was to revive private-sector growth and employment, which makes everything else possible, not to do costly, socially worthwhile things that increase burdens on the private sector and make recovery more difficult.

Cohen embraces the Keynesian position. He claims that the “depression within a depression” of 1938 was brought on by FDR’s decision to cut deficit spending. This view disregards other factors. The Banking Act of 1935 concentrated power at the Federal Reserve in the Federal Reserve Board and the Open Market Committee. The assumption was that Fed governors were smarter than the Fed’s regional banks. But the governors were human beings, too. They made mistakes, and their power magnified the harm done by their errors. The new Federal Reserve Board’s first bad call came on July 14, 1936, just five and a half months after it had begun to operate, when it required that banks increase their reserves by 50 percent, thereby reducing funds available for lending. Six months later, the Fed ordered that banks increase their reserves another 33 1/3 percent. Often it can take a year or more for a Fed action to play out, and the result was a jump in interest rates that sent the economy reeling. Fed governors were slow to recognize the effects of what they had done.

And Fed blunders weren’t the only state-inflicted blows on the economy. A succession of New Deal tax increases took their toll: the undistributed profits tax, enacted in March 1936, and the Social Security payroll tax, which began in 1937. Furthermore, New Deal labor laws—notably the Wagner Act—put the power of the federal government behind aggressive efforts to promote compulsory unionism. Labor costs went up 11 percent in 1937—the second double-digit increase during the Depression—and violent strikes disrupted production. 

Blaming the depression of 1938, as Cohen does, on spending cuts amounts to conceding that the New Deal had failed to revive private-sector growth and jobs. Far from being the self-sustaining phenomenon it had been back during the prosperous 1920s, the economy had become dependent on federal spending. A comparatively poor, Third World economy in the 18th century, the United States had gone through an industrial revolution and become an economic powerhouse, a magnet for millions of immigrants, without the Keynesian “stimulus” that was ballyhooed during the Great Depression.

Toward the end of his book, Cohen offers a remarkable concession: “Roosevelt’s critics like to point out that the New Deal did not end the Great Depression … it took World War II to restore the unemployment rate to where it had been before the Great Crash.” He goes on to suggest, however, that the New Deal might have achieved more if it had done more deficit spending, as if money came out of thin air. Yet the truth is that the New Deal tried all sorts of things, including deficit spending, and FDR couldn’t get unemployment below 14 percent. 

It’s not as if nobody had ever figured out how an economy could recover from a depression. In less than two years, the much maligned Warren Harding dispatched the post-World War I depression, which was almost as severe, peak to trough, as the Great Contraction of 1929-33. He cut taxes, cut spending, and went back to his card games. He was smart enough to realize that neither he nor any Brain Trusters were capable of running the economy. During the Roaring 1920s, which FDR’s reformers disparaged, unemployment went down to an amazing 1.8 percent.

FDR didn’t cause the Great Depression. His predecessor Herbert Hoover made a bad situation worse with his steep tariffs and big tax increases. But FDR was president when the Great Depression dragged on and on until World War II. If he had retired after his second term, he probably would now be seen as a failed president. His reputation was bailed out by World War II, which he will always get credit for winning.

What, then, can we learn from the New Deal about promoting economic recovery? No more New Deals!  

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