NCPA - National Center for Policy Analysis


June 26, 2007

The familiar story line in the received wisdom about President Roosevelt's New Deal is that while it may not have been perfect, it did inspire the American people and tide them over.  Here the emphasis is wrong.  Roosevelt's radio voice may have inspired people but the New Deal hurt the economy, and that mattered more, says Amity Shlaes, Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations

Roosevelt flunked by two measures that we today know are critically important: the unemployment rate and the Dow Jones Industrial Average.  Consider:

  • Unemployment stood at 20 percent in 1937, five years into the New Deal.
  • As for the Dow, it did not come back to its 1929 level until the 1950s.

This result is not surprising, given some of the economic decision making, says Shlaes:

  • Roosevelt personally experimented with the currency -- one day, in bed, he raised the gold price by 21 cents.
  • When Henry Morgenthau, who would shortly become Treasury Secretary, asked him why, Roosevelt said that "it's a lucky number, because it's three times seven."
  • In addition, a central part of the New Deal, the National Recovery Administration (NRA) -- with one of its premises that price cutting caused deflation -- was perverse.
  • A think tank produced a report of 900 pages in 1935 concluding the NRA "on the whole retarded recovery" (that think tank was the Brookings Institution).

So why has it taken so long to revisit this period?  A main reason is a generational one, says Shlaes.  To insult the New Deal is to insult the Social Security that we, our parents, or grandparents receive.  But this reliance on entitlements has overshadowed what we have learned in the past half-century -- that markets can do much of the work that Roosevelt believed only government capital could do.

Source: Amity Shlaes, "The Real Deal," Wall Street Journal, June 25, 2007.

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