The Roosevelt “Stimulus”

“Nothin’s wrong with this country that ain’t only just temporary.” Diamond Jim Brady was speaking for many Americans when he made that statement of faith in America’s capitalist system. The year was 1895, and the nation was two years into a deep economic depression. The country had been through other depressions before, the most recent starting in 1873, and had always recovered quickly. Soon Brady’s prediction would come true; within a couple years the country would start another period of strong economic growth.

Before the 1930’s the United States had suffered, and quickly recovered from, many economic depressions. Until Herbert Hoover became president in 1929 the federal government made little pretense of being able to legislate prosperity. The usual government response to recessions and depressions was to trim spending a little, in response to the reduction in tax revenues, and just wait for movers and shakers like Diamond Jim Brady to re-build the nation’s economy.

The depression of the 30’s was the first one to which the government responded with massive increases in spending; and it would turn out to be the one that hurt the nation the most, and lasted the longest. But don’t expect to hear that in a typical college history class; today’s mostly left-leaning college faculties are teaching their young charges that the Great Depression of the 1930’s was an unprecedented event that could only be overcome through massive government spending and a restructuring of the economy under strict government control.

The View from The Left

In his freshman history textbook Give Me Liberty, Professor Eric Foner tells states that “The federal government had never faced an economic crisis as severe as the Great Depression” (of the 1930’s). He describes how the federal government, first under President Hoover and then under President Roosevelt, increased government spending in an effort to rebuild the nation’s economy from Washington DC. No mention is made of the success America had had in overcoming previous depressions without government intervention.

Foner actually describes the New Deal policies of President Franklin Roosevelt, by which Roosevelt and the Congress tripled government spending in peacetime, as having been too small. “Given the scope of the economic calamity it tried to counter,” Foner tells us, “the New Deal seems in many ways quite limited.” Roosevelt’s big mistake, according to the professor, was cutting federal spending on farm subsidies and the Works Progress Administration (WPA) in 1936. “The result was disastrous,” he says, “As government spending fell, so did business investment, industrial production, and the stock market.”The final answer, Dr. Foner tells us, was still more government spending. “Only the mobilization of the nation’s resources to fight World War II would finally end the great depression.”

The three authors of the freshman textbook America’s Promise frame Roosevelt’s New Deal and wartime spending in the same light. The New Deal programs were too modest to help, and were cut back too severely in 1936; and only the wartime expansion of government starting in 1942 was large enough to end the Great Depression:

Roosevelt’s second mistake was attempting to balance the budget by cutting government spending when the economy remained weak and dependent upon federal expenditures. Although in his first term Roosevelt had reluctantly accepted budget deficits as necessary, he remained essentially a fiscal conservative. Roosevelt believed, however, that the economy was recovering and continued deficit spending might release runaway inflation. As a consequence, in late 1935 and early 1936 Roosevelt began systematically to slash the federal budget, including funds for the WPA. (Italics added)

Calling Roosevelt a “fiscal conservative” is plain dishonest. The Congressional Budget Office has produced a spreadsheet of revenues and spending, which shows that government spending skyrocketed on Roosevelt’s watch. In fact government spending in real dollars had already shot up by nearly 50 percent between the start of the Depression and Roosevelt’s first year in office, as Congress and the Herbert Hoover administration took the unprecedented step of trying to spend the country out of its troubles with taxpayers’ money. Then Roosevelt, the supposed “fiscal conservative,” increased spending from $4.2 Billion to $8.2 Billion in just three years, bringing 1936 spending to a level more than two-and-a-half times what it had been in 1929.

The spending cuts between 1936 and 1937, which our textbook authors blame for prolonging the depression, still left government spending at a level nearly two-and-a-half times the pre-depression level.

By 1941, the year before the United States entered World War II, the government spent $13.653 Billion; about triple the spending Roosevelt had inherited from Hoover, and more than four times the level of government spending before the start of the Great Depression. The depression had lasted longer than any other in American history at this point, and the unemployment level was still around ten percent.

In May of 1939 Roosevelt’s own Treasury Secretary admitted that the runaway spending had been a failure. “We are spending more than we have ever spent before,” said Henry Morgenthau, “and it does not work…We have just as much unemployment as when we started…and an enormous debt to boot!”

The New Deal in Historical Context

In 1907 and 1920, the United States suffered economic downturns just about as severe as the one that started the Great Depression of the 1930’s. When the 1907 panic struck the President was Teddy Roosevelt, a distant relative of later President Franklin Roosevelt. The Teddy Roosevelt government kept spending growth to a fairly modest twenty percent over two years. During the following three years the Woodrow Wilson government would actually cut spending a bit, while the national economy recovered strongly.

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The next major depression was in 1920. As the spreadsheet shows, President Warren G. Harding’s government dramatically cut government spending, cutting tax rates at the same time. Between 1920 and Harding’s death in 1923 Harding and the Congress cut government spending in half! The economy responded beautifully, creating prosperity and jobs at a rapid rate for years.

In 2009 the US is again in a deep recession, with businesses losing money and unemployment hovering around ten percent. According to the view of history being presented on our college campuses, the only proper government response to the problem is a massive increase in federal spending to “stimulate the economy.” There is another side to the story, and it would be good for our nation’s future to have our next generation of leaders hear both sides.

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2 thoughts on “The Roosevelt “Stimulus”

  • Good question, Mr. Baker.

    I am neither of the left nor of the right, I proudly call myself a Pragmatist and I like to look for policies that work. You correctly point out that FDR’s stimulus spending did indeed bring about a period of very rapid growth. The trouble was that the economy had dropped so far from 1929-33, that the growth of 34-36, although it was phenomenal, stopped before it had reached the pre-1929 level. One reason for this was that in 1937, FDR, who was at heart a fiscal conservative, stopped most of his stimulus spending, and the economy immediately returned to a slump – almost as bad as the previous one. What the left never mentions is that FDR was not necessarily trying to END the depression, he was merely trying to heklp the ulk of the population survive it. What the right does not tell you is that FDR’s stimulus worked as long as he kept it up. If he had maintined it for another 2 years, there would not have been that second slump from 1937-39.

    The gorss inaccuracy in this original post is the statement “The country had been through other depressions before, the most recent starting in 1873, and had always recovered quickly.” This is highly inaccurate. The depression that started in September of 1873 lasted until the spring of 1879 — nearly 6 years. The depression that started in 1893 lasted almost 4 years. The Depression that started in 1837 lasted over 6 years. thee Depression that started in 1819 lasted nearly 5 years. I do not consider this to “recovering quickly”, nor did the people who suffered through it.

    Statistically, from the end of the Revolutionary War 1783 1933, the US was in a depression or recession approximately 42% of the time. Some period of depression lasted as long as 6 years, others were a brief as 10-12 months. But the fact remains that almost half of the 150 years from the end of the Revolution to the New Deal was spent in “hard economic times”. The good economic times seldom lasted more than 3 – 4 years and during from 1843-60 and again from 1879-93, the economy went through alternative short spurts and short slumps with neither the good nor bad times lasting more than 18 months at a time.

    In the 79 years since FDR initiated his policies, the US has been in recession for less than 17% of the time. Of course it was not just FDR’s safeguards that get the credit, big spending on defense, interstate highways, space programs, rebuilding Europe after the war and other major programs were a big factor, too.

    Obama did not learn this lesson. His stimulus was all focussed on small funds paid out for small projects, many of them with some type of social engineering goal (I know a consultant who got a stimulus contract on deomestic violence prevention project, for a whopping $30K.)

    The lesson from 2009 is not “stimulus doesn’t work”, the lesson from 194 versus 2009 is “stimulus has to be large scale to work”.

  • Yet, evidently the growth rate of the US economy was highest in 1935-1937 than before or since. I’m truly puzzled. To me that’s the best indication that the stimulus was working and that Hoover’s stimulus was not enough. How do you explain that?

    Would more people coming into the work force encourage others who had lost hope and were not listed as officially unemployed then be encouraged to apply for employment so that the employment rate looked like it didn’t go down?
    What does the growth in jobs look like over those years you discuss? (not unemployment)

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