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Out, Out Damn Depression: FDR in 1938

Ludwig Von Mises Institute: 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 bemedaled architect was crumbling around him.

One thing was certain. The Second New Deal (1934–1936) was a flop. The First New Deal (1933) 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.

FDRspendingHoleThe 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 2- or 3-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.

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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.

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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 million and the president's plans would increase the deficit to $3.5 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 and 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 — that 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.

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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.

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 that 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 billion 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.

John Thomas Flynn (1882–1964) was an outspoken critic of the Roosevelt administration's domestic and foreign policy decisions, opposing both the New Deal and the Second World War. As Mises Institute senior fellow Ralph Raico described Flynn in his introduction to the 50th anniversary edition of The Roosevelt Myth, "There is little doubt that the best informed and most tenacious of the Old Right foes of Franklin Roosevelt was John T. Flynn." See John T. Flynn's article archives.

This article is excerpted from The Roosevelt Myth (1948).

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