When the damage was done...

How 1936 Consolidated the Progressives' Triumph in 1913
Gary North

Politically conservative Americans and libertarians generally agree on the worst year of the 20th century: 1913.

In 1913, three major events took place. First, Americans were informed that a constitutional amendment establishing an income tax passed. That was a lie. It did not pass. But the Attorney General of the United States announced that it had passed, and so, as far as the public was concerned, it had passed.

Second, the Constitution was amended, so that members of the Senate were voted into office by a general public election. This was mostly a symbolic change. Over half of the states had already adopted this. But it was a recognition that there had been a fundamental alteration of the United States Constitution. The old idea that the Senate would be elected by state legislatures was now officially defunct.

The third issue was the creation of the Federal Reserve System in late December.

The election of 1912 had pitted three Progressives against each other: Taft, Roosevelt, and Wilson. The election of 1904, in which the never-remembered Alton B. Parker lost to Teddy Roosevelt, was the last time that anyone holding constitutional principles of the federal government achieved the nomination by one of the two major political parties. Teddy Roosevelt smashed him at the polls. After the election, the radical Populist William Jennings Bryan announced that this was the end of "Clevelandism." He was correct.

1936

I submit that the year 1936 was the second disastrous year in the 20th century. In that year, Franklin Roosevelt was overwhelmingly reelected as President. The New Deal seemed to have been successful in reducing unemployment and getting the economy working again. In fact, it was monetary expansion by the Federal Reserve, coupled with the creation of the FDIC in 1934, which combined to allow the expansion of the money supply, which boosted the economy in a temporary boom.

In 1937, that boom turned into a major recession. From that time on, the New Deal was unsuccessful in overcoming the Great Depression. Only with the beginning of orders for military purchases by the British government in 1940 did the Great Depression recede. It disappeared during World War II, because of the combination of mass monetary inflation and price controls. The government pulled 12 million men out of the labor force, and it then expanded the economy by military purchases. Price controls lead to rationing. So, the rate of unemployment fell, along with 405,000 American dead, who were removed from the category "actively seeking employment" on a permanent basis. The Great Depression -- unemployed resources -- disappeared because real wages fell sharply, which is exactly what would have happened, had President Hoover and President Roosevelt not imposed various price floors, which kept prices from adjusting, thereby failing to clear the markets.

The other major event of 1936 was the publication of John Maynard Keynes's book, The General Theory of Employment, Interest, and Money. After six years of depression, standard economists, other than the Austrian school economists, could not explain the Great Depression. It should have disappeared by 1933. It did not. The academic economists had no explanation, and the younger economists wanted one. Keynes's book seemed to offer both an analytical solution and a practical solution: massive government deficit spending. This was what governments had been doing ever since 1930, but Keynes's book baptized the practice, and called for more of the same.

Those economists who, in later years, would be critical of Keynes's economics, were like deaf-mute blind men in 1936 and 1937. Hayek did not respond in public to the book, which relegated his career from 1936 to 1974 as a kind of forgotten critic on the sidelines of economic analysis. The economics profession abandoned him, because he had abandoned the economics profession. He was the major critic of Keynes in 1936, and he refused to respond in print to the book. It seemed that he had been defeated intellectually. It seemed that Keynes's economic analysis was immune to criticism by the most famous member of the Austrian school of economics.

In 1937, McMillan, which had published Keynes's book, and which had previously published the 1934 book by Lionel Robbins, The Great Depression, published a book by three authors, which analytically dealt with the causes of the Great Depression: Banking and the Business Cycle. It blamed central banking. But this book never got any traction, and it remains forgotten today. Fortunately, the Mises Institute makes it available free of charge or in a conveniently printed format, but almost nobody remembers it. Almost nobody knew about it in 1937.

Keynes created an intellectual revolution within the economics profession, and also within the political community as well. Keynes advocated what the politicians wanted to do anyway. We live in the shadow of Keynes, because the academic economists lived in the shadow of the Great Depression in 1936. They were defeated intellectually, or in Hayek's case, remained mute. That was sufficient to transfer to Keynes and his disciples the intellectual leadership in economics for the remainder of the 20th century, and it is still dominant today. It is not so dominant as it was in 1956, or 1965, but it is still overwhelmingly dominant.

FREE RIDES

I have recommended that some bright young economist in the Austrian school should take up the challenge, and devote the next 20 years to a comprehensive refutation of Keynes's General Theory. No one has accepted my challenge. It is indicative, once again, that Keynes gets a free ride.

Furthermore, the New Deal gets a free ride. We are still waiting for a comprehensive refutation of the idea that Franklin Roosevelt saved American democracy from itself politically, that he saved the capitalist system from the self-destruction by the capitalists, and that he was lured into World War II, not because he pressured the Japanese government to attack Pearl Harbor, but because of the supposed ruthlessness and shortsightedness of the Japanese Empire. He has had a free ride ever since 1945, at least in the textbooks. The Ken Burns PBS series on the Roosevelts is simply the latest example.

There have been books against various aspects of the Roosevelt administration, but there is no single book, written by a skilled historian, who also understands Austrian school economics, that comprehensively criticizes the entire thrust of the New Deal as a war against constitutional government, free market economics, and personal liberty. Franklin Roosevelt is not seen as the man who completed the destruction of the American Republic, a process which had been visibly inaugurated by Abraham Lincoln, secured by Woodrow Wilson, and buried by Franklin Roosevelt. No one arguing such a thesis could get tenure in any major American university, and the book would not be published by any major American publishing house. So, no historian attempts to write it.

Thomas DiLorenzo could write the economics portion of the book, but he has no expertise in the revisionist literature of World War II. The book would have to be a two-scholar job. But, remember, Di Lorenzo is not a professionally certified historian. To get the book written, the historian who was writing the section on Pearl Harbor would have to enlist the support of a skilled amateur from out of the economics department. Again, it gives an indication of just how bad the situation is today, almost 70 years after the death of Franklin Roosevelt.

Furthermore, as far as I know, no American historian has gone back through all the material on World War II revisionism, restoring the old arguments, posting primary source documents, and devoting at least 20 years to a detailed study of the event. The major revisionist historians of that event remain those who had received tenure prior to World War II, and who published their books between 1946 and 1953: Charles A. Beard and Charles C. Tansill. As an historiographical issue, the Rockefeller Foundation and the Council on Foreign Relations have been successful ever since 1946. They buried World War II revisionism before it began. They did it with money. Then the academic community chimed in, dismissing World War II revisionism as a conspiracy of crackpots. So it remains today in the halls of academe.

It is not that we have not had first-rate historians who could have done this task. It is not that we have not had first-rate economists who could have done the demolition job on Keynes. It is that we have not had dedicated young men who were willing to devote their entire careers to what was clearly a kamikaze operation. They have wanted to the climate of academic opinion to change before they devoted their lives to the seemingly impossible task of changing that climate. They are unwilling to pay the price.

CONCLUSION

Until the myth of Keynes and the myth of Franklin Roosevelt, which are closely entwined, are refuted in a series of comprehensive, scholarly materials, and then translated into materials accessible to the general public, and rhetorically effective among bright high school students who are in homeschool programs, we will remain on the receiving end of the Establishment's overwhelming control of the media and academia. The World Wide Web offers a way to get around both of these Establishment operations, but in these two fundamental areas of American history -- the New Deal and Keynes's original introduction to Keynesianism -- we have not yet begun to fight.

The intellectual battles over the New Deal and Keynes were part of a continuing war. Conservatives and libertarians lost both in 1936, but not because of their lack of theory. Mises had provided the basis of the answer in 1912 with The Theory of Money and Credit. Hayek also had the foundation: Monetary Theory and the Trade Cycle (1933). But neither of them sat down in 1936 to write definitive answers to Keynes. Neither of them ever did. Mises wrote a major book in 1957: Theory and History. By then, Keynes was triumphant in Western academia. Hayek's final book was in 1988: The Fatal Conceit.

You have to fight when the battle comes to you. It is not good enough to be well armed. You have to stand your ground and fight.

We have yet to have a full-scale assault on The General Theory. Hazlitt's Failure of the "New Economics" (1959) was a beginning, but a one-volume refutation that was read by almost no one is not enough. There has to be a full-scale assault. It has to be continuing. It must begin with The General Theory. It then must extend to Samuelson's Economics: every edition.

With respect to FDR, Flynn's The Roosevelt Myth (1948) remains the only one-volume critique of the entire FDR period: domestic policy and foreign policy. It was not written by a trained historian, but by an old journalist critic. It failed to draw blood in 1948. The myth of FDR is still universal.

The twin battles still rage. We are still losing. Until we win both, we will continue to lose the war.

A Great Default is coming. It will be the Western liberalism's version of the Great Depression. At that point, the joint legacy of FDR and Keynes will be vulnerable to revision. The work of revision should begin now.

It should have begun in 1937.

Link:
http://www.garynorth.com/public/13046.cfm