Did FDR and Socialism End the Great Depression?

fdrCourtesy of Occupy Democrats, with over 46,000 likes and 36,000 shares.  This meme makes several claims about FDR and the Great Depression, some of which are either wrong or very misleading.  We’ll break it down by each claim.

Unemployment Went From 25-2% Through Stimulus Programs

When FDR was elected, the unemployment rate was at about 25%, which ultimately declined to 2% before his death, but that leaves out a tremendous amount of context, much of it disproving the thesis that it was socialist policies that helped.

If we look at a chart of unemployment during FDR’s reign, we see that unemployment was very high for the majority of it.  He can’t be faulted for inheriting the beginning of the Depression, but he can be for it dragging on.  Even toward the end of his second term (which every other president was limited to), unemployment was still at about 15% and the economy was miserable.  He also oversaw the “depression within a depression“, a serious downturn in 1937 during his second term.  This was a period where GDP contracted 5% in a year, stocks fell 40% and unemployment spiked back up above 20%.  For perspective, the worst unemployment officially got during the Great Recession was about 10%.


Unemployment during FDR years. Source

The period where unemployment was 2% had nothing to do with the New Deal, or job stimulus bills, and everything to do with World War II.  Over 12 million of America’s prime workforce candidates were taken out of the workforce  and put into the military.  While sending men into battle is one way to reduce unemployment, it’s hardly a jobs strategy worth applauding, nor does it mean the economy is strong.  Most people would much rather be unemployed than sent to a battlefield (leaving aside patriotic defense).  There are many instances of totalitarian regimes having low, or no unemployment, like Cuba.  This has little bearing on economic prosperity, and we should really be interested in an unemployment rate in a voluntary economy, not wartime economies.

Did the New Deal Improve the Economy?

The New Deal and FDR’s make-work programs were unprecedented in scope, but they didn’t get America out of the Depression, and were often failures.  Many boondoggles are largely forgotten, like the “dream city” of Ak-Sar-Ben (Nebraska spelled backwards), which was a government-built community near Omaha that no one wanted to move into.

Not so much socialist as fascist, his programs (many ruled unconstitutional) intervened into the economy in many ways. From agriculture to manufacturing, from seamstresses to small chicken butchers, few businesses were exempt from the often draconian controls enforced by the National Recovery Administration (NRA).  As journalist John T. Flynn put it:

The NRA was discovering it could not enforce its rules.  Black markets grew up.  Only the most violent police methods could procure enforcement.  In Sidney Hillman’s garment industry the code authority employed enforcement police.  They roamed through the garment district like storm troopers.  They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant.  Night work was forbidden.  Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night.

Even historians who sympathized with FDR have admitted its failure.  Historian Robert McElvaine writes:

For all it did, for all it changed, the New Deal never succeeded in its primary goal: ending the Depression.

Pro-FDR historian William Leuchtenburg conceded FDR’s National Recovery Administration

did little to speed recovery, and probably actually hindered it by its support of restrictionism and price raising.

Other economic historians are more harsh.  Economists Richard Vedder and Lowell Gallaway from Ohio University found:

The Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs.

Professors Cole and Ohanian of UCLA, claim FDR prolonged the Depression by 7 years.  About the New Deal, they concluded:

New Deal labor and industrial policies did not lift the economy out of the Depression as President Roosevelt had hoped.  Instead, the joint policies of increasing labor’s bargaining power and linking collusion with paying high wages prevented a normal recovery.  Not only did the adoption of these industrial and trade policies coincide with the persistence of depression through the late 1930s, but the subsequent abandonment of these policies coincided with the strong economic recovery of the 1940s.

If we look to the previous economic downturn, the often forgotten Depression of 1920, we see a different picture.  This was also a significant economic contraction, with GNP declining 17% and unemployment tripling, yet for a variety of reasons the government did almost nothing.  In fact, Harding even cut spending in half.  In less than 2 years, the country was out of the depression and the Roaring 20’s began.  Far quicker and more successful than any of FDR’s “solutions”, it is mysteriously never heralded.

The FDIC Shields Americans from Wall Street Meltdowns?

This claim is dubious, and there is a strong argument that the FDIC (Federal Deposit Insurance Corporation) makes banks more reckless.  Instead of letting the market force banks to become more responsible and secure, the FDIC masks the problem by telling depositors their money is “insured”.  This removes the incentive for depositors to investigate or care how their bank operates.  Notice that most consumers research items they buy like cars, electronics or houses, yet few ever research their banks.  This creates a moral hazard, where banks can be much more reckless in their loaning practices, necessitating the need for further government regulation of the banking system.

The reality is that the FDIC currently only has about 2% of the deposits it insures, and considers 1.35% to be a safe amount of reserves.  This means if there’s a large banking collapse, there isn’t even close to the amount of funds to protect depositors.  It’s true that the Federal Reserve could print the billions or trillions needed and give it to the FDIC, but this exposes the true nature of the system’s fragility.  These deposits would then be multiplied by the fractional-reserve system, where banks can lend 10-20 times their deposits, and unleash a hyperinflation type scenario.  For example, a $1 trillion bailout would result in $10-20 trillion of new “money” in the economy.  In other words, the entire banking system is a house of cards, kept afloat only by confidence, which the FDIC helps to perpetuate by telling depositors they have no risk.  A 100% reserve banking system would be the best protection to consumers, and frankly, the only type of system not built on fraud.  The FDIC serves primarily to protect the banks.

Not only has the FDIC failed to shield us from financial meltdowns, like the S&L crisis or housing bubble, it actually perpetuates the recklessness and fraudulent nature of the fractional-reserve banking system by removing any market mechanism to protect us from risky lending.  Notice, no other industry (real estate, oil, agriculture, etc.) needs such an insurance scheme to protect it from downturns.  In other industries, downturns don’t create systemic collapses, because they don’t create money out of thin air.

Social Security Ended Elderly Poverty?

Currently, about 10% of the elderly are in poverty, so it certainly hasn’t ended it.  In the 1960s, almost 3 decades after Social Security, the elderly poverty rate was still above 30%.  Social Security does keep many elderly afloat financially, but there are many trade-offs to that.  For one, it takes 12.4% out of most people’s paychecks (6.2% from employee and employer).  It’s also unsustainable at current levels, meaning later generations will likely get a much worse deal than the first generations under Social Security, particularly if they had been allowed to keep and invest the extra 12% of their money.  Like most schemes, it works out well for those in the beginning, and hurts those who come in later.

FDR Was So Popular He Was Elected 4 Times?

FDR was indeed popular in many regards, and provided hope with his fireside chats and demeanor.  On the other hand, the 22nd Amendment was passed just 2 years after his death limiting the president to 2 terms, so clearly his reign didn’t inspire joy among everyone.  Regardless, history is littered with politically popular figures who have done much harm.  Hugo Chavez was elected four times, for example, and was quite popular.  Often, the people don’t see what’s really going on, or connect how certain policies affect things.  The achievements of FDR are widely known, but here’s a partial list of less admirable things he did that might change people’s opinion, and question the greatness of his “socialism”:

  • Outlawed owning gold and required American citizens to surrender all bullion and notes redeemable in gold in exchange for Federal Reserve notes.  He then changed the gold standard from $20.67/oz to $35/oz, effectively stealing 40% of people’s money, although American citizens were not allowed to exchange their paper for gold at any exchange rate.
  • Established 700 cartels in the economy, which raised prices artificially, unnecessarily hurting the poor and minorities the most.
  • After the Supreme Court had ruled much of his New Deal unconstitutional, FDR attempted to “pack the court“, by giving himself the power to appoint up to 6 new judges.  This never materialized, but the intimidation worked, as the court became much more permissive of his measures later on.
  • In attempts to raise agriculture prices, farmers were paid hundreds of millions to destroy food resources, including 10 million acres of farmland, and the slaughter of 6 million baby pigs.  At the same time, Agriculture Secretary Henry Wallace claimed a great problem was the nation’s failure to produce enough food.
  • He proposed a 100% tax rate on incomes above $25,000 (about $350,000 today), which Congress refused.
  • Issued Executive Order 9066, which forced over 100,000 Japanese Americans into internment camps.