Essay: New Ordeal

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Dow Jones Industrial Averages, 1929-49.
Dow Jones Index in constant dollars relative to the price of gold. The chart is a good reflection of living standards throughout the period.

The New Ordeal is the period of time between 1929 and 1949, when the American economy finally recovered from the Crash of '29. It encompasses the four presidential terms U.S. President Franklin D. Roosevelt had been elected to, the final term having been administered mostly by his successor, President Harry S. Truman. The New Ordeal also is sometimes referred to as the Great Ordeal or simply the Ordeal.

During the twenty years of the New Ordeal, America experienced 2 deep recessions, or essentially a second depression within the Great Depression, and World War II, a calamity that claimed the lives of 55 million people worldwide. Many of the nations involved in World War II resorted to "economic planning", as Economist Friedrich Hayek referred to it, to address the so-called "crisis in capitalism" in the 1930s.

The 1929-1949 recession had within it a recession from 1937-1943; 1933 to 1937 were recovery years stimulated by the New Deal government spending. However, by 1937 the nation had nowhere near recovered to where it was in 1929. Manufacturing demand stimulated by WWII led to the 1943-1949 recovery, where finally, in 1949, the New York Stock Exchange recovered to the level it had been at 1929.

In 1929 the DJIA declined 90.0% over a duration 34 months. Six successive market crashes comprised this famed bear market: (1) September to November 1929 (DJIA fell 40% in this first phase). (2) April to June 1930. (3) September to December 1930. (4) March to May 1931. (5) July to January 1932. (6) March to July 1932. A new bull market then started immediately, as did a business recovery.

Business had topped out mildly, a month before the first crash; a gradual mild decline continued to April 1930, then fell sharply into a depression simultaneously with the end of the 1930 stock market rally. The business decline halted in December 1930, stayed level for 6 months, then plunged again in steep economic decline that didn’t lose its downward momentum for a full year, until July 1932. Business improved intermittently thereafter but still remained at depression levels through most of the decade of the 1930s except for a short recovery in 1936–37.

In 1934 a fall of 24.1% in the DJIA began again over 9 months. Then the market took seven more months to get back up to where 1934 began.

Economic planning

Main article: Economic planning
Criticism of Economic Planning was suppressed; F. A. Hayek's Road to Serfdom was rejected for publication 3 times "on political grounds" [1]
Planning will become a function of the federal government; either that or the planning agency will supersede the government, which is why, of course, such a scheme will be assimilated to the State.

Rex Tugwell[2]

The New Deal did not promote economic recovery, rather it established a system which required a permanent crisis to support a military industrial complex. The system resembled the managed and bureaucratized, state supported system of Germany before World War I. Before this regime the United States lived in a system which depended for its economic expansion upon private investment in private enterprise. After World War II the US lived in a system which depended for its expansion and vitality upon the government. This is a system, based upon a pre-World War II European model created at the moment when it had fallen into complete disrepute and disintegration in Europe.[3]


Enforcement of the Anti-trust Act was considered as an essential instrument to prevent cartels and trusts in restraint of trade which had been viewed as deadly to the system of free enterprise. On the campaign trail in 1932 Franklin Roosevelt called loudly for its strict enforcement. Yet immediately upon Roosevelt's accession to office the Anti-trust Act was suspended in order to cartelize every industry in America on the Italian fascist corporative model.[4]

The National Recovery Act (NRA) and the Agricultural Adjustment Act (AAA) were plans to take the whole industrial and agricultural life of the country under the wing of the government, organize it into vast farm and industrial cartels, as they were called in Germany, corporatives as they were called in Italy, and operate business and farms by economic planning schemes dictated and carried out under the supervision of government. This, at the time, was known as fascism. In those days fascism was not yet defined as anti-­Semitism.[5][6]

Managerial state

James Burnham, a former Trotskyite, discovered in 1941 that the "workers revolution" which allegedly was to overthrow the capitalist "exploiters", was in real practice a "managerial revolution" which replaced older 19th century owners of capital with twentieth century technocrats and managers. Burnham found that "workers in this mythical 'workers' state' were, the facts showed, a subject class far more heavily exploited than the workers under capitalism," and that the new managers in a planned economy "have curbed the masses and have instituted a social structure in which they are on top, not by virtue of private property rights in the instruments of production, but through their monopoly control of a state power which has fused with the economy." [7]

Wealth Tax Act of 1935

The New Deal was able to expropriate the upper income brackets even before World War II. In 1929, total aggregate Personal Income was estimated at $80.6 billion and the tax brackets making above $50,000 retained $5.2 billion, after income and surtax; in 1936, when total Personal Income was estimated at $64.2 billion, not quite $1.2 billion was retained by "the Rich". Taxable income above $100,000 was wholly absorbed by the government when account is made of the inheritance tax. Economist and former Austrian Finance Minister Joseph Schumpeter described it in these terms:

"a tremendous transfer of wealth has actually been effected, a transfer that quantitatively is comparable with that effected by Lenin. The present distribution of disposable incomes compares well with the one actually prevailing in Russia.[8]

Class warfare

Main article: Class warfare

Robert H. Jackson, Assistant Attorney General, and Secretary of the Interior Harold Ickes in December 1937 made speeches inspired by the President on the conspiratorial Marxist diatribe, America's 60 Families. [9]

In February 1944 Congress rejected Roosevelt's demand for a $10,500,000,000 tax increase and cut it to $2,300,000,000. Roosevelt vetoed it saying this was a "bill not for relief of the needy but of the greedy." Senator Alben Barkley, Democratic leader, rose on the floor of the Senate to say the veto was "a calculated and deliberate assault upon the legislative integrity of every member of Congress." The entire Senate united in a roar of applause. Barkley declared that after seven years of carrying the New Deal banner for Roosevelt, he would resign his post as Democratic majority leader and he called on every member of the Congress to preserve its self-respect and override the veto. The Senate overrode it 72 to 14 and the House 299 to 95.

Crash of 1937

1937 DJIA declined 51.8% over 56 months. There were five crash phases: (1) August to November (DJIA fell 40% in this first phase). (2) February to March 1938. (3) January to April 1939. (4) May 1940. (5) October 1941 to April 1942. Business peaked out and fell violently, simultaneously with stocks. Economic indicators bottomed out 9 months later (May 1938). The recovery began mildly at first, but not until the World War II production boom was the country lifted out of the Great Depression.

The period 1941–42 contained the longest nonstop downswing crash (7 1/2 months) in history. Certain analysts call this two separate bear markets, one from September 1937 to March 1938, and the second from May 1940 to April 1942.

During the Great Bear Market from 1929 to 1942, the Dow Jones Industrial Average (DJIA) had rallies of 48% (from November 13, 1929, to April 17, 1930), 94% (July 8, 1932, to September 7 of that year), 121% (February 27, 1933, to February 5, 1934), 127% (July 26, 1934, to March 10, 1937), 60% (March 31, 1938, to November 12 of that year), and 28% (April 8, 1939, to September 12 of that year). Yet, on April 28, 1942, the apex of the Malthusian crisis that was World War II, the DJIA was still at only 92.92, 76% below its September 3, 1929, high of 381.17.[10]

Double-dip recession

When FDR was inaugurated for his second term in March 1937 national income, payrolls, and industrial production[11] were still 20 per cent below the 1929 figure and construction was still only about one third what it had been in 1929 when the nation had a booming economy due to massive speculation that would ultimately lead to the stock market crash. By June, 1937 the U.S. Treasury reported relief payments were less than in the same period the preceding 12 months, however this was not so. The Treasury merely shifted relief payments to other accounts. Relief payments were, in fact, larger than the year before. The Treasury made a practice of "cooking the books" to produce phony numbers. Stock prices declined and by September the dire reality could be no longer hidden. By the end of October 1937 the market crashed. The U.S budget was running a deficit at the time of $300,000,000 a month.

Unemployment worse than in 1933

In January 1938, John D. Biggers in a study commissioned by President Roosevelt reported there were 10,870,000 people out of work, more than when FDR first took office in 1933. [12] Roosevelt realized that all the “pump priming” and spending $17 billion had failed. Despite the billions added to the debt, the Depression was back and Roosevelt was at the center of a tug-of-war with advocates of spending like Harry Hopkins, Leon Henderson and Rex Tugwell on one side, and opponents like Henry Morgenthau on the other.

DNC Chairman Jim Farley recalled on a meeting with Roosevelt on March 28, 1938. FDR told Farley he would have "to go in for pump priming or relief," but complained 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 pay for in perpetuity. States and localities were having trouble paying the bills on New Deal projects already built. Many WPA projects approved by the federal government were abandoned because the states and cities could not raise the money to support and occupy them.

In the 1938 Congressional elections Harry Hopkins oversaw spending programs with no regard for economic utility to meet the immediate political necessities of an election, but the growth of debt could not go on indefinitely. And the New Dealers problem was complicated by pressure from within the Democratic party to balance the budget.

New capital made available for investment amounted to $348,000,000 in 1935. This was less than 1/10th of the amount available in 1929. By contrast, the British economy had nearly recovered to its 1929 levels by 1935, and the amount available for investment was almost twice as much as the United States.

Year United States [13] Great Britain [14]
1927 $3,201,000,000 $710,509,000
1928 3,062,000,000 983,033,000
1929 3,668,000,000 759,174,000
1930 3,039,000,000 394,186,500
1931 1,006,000,000 155,728,000
1932 321,000,000 248,191,500
1933 177,000,000 296,856,500
1934 356,000,000 350,388,000
1935 348,000,000 666,710,500

The country now reached a greater crisis than in 1933. The National debt, which was $22 billion when Roosevelt took office and largely a heritage of World War I, now was $37 billion. Taxes had been more than doubled by Roosevelt.

By April 1938 unemployment reached several thousand more than when Roosevelt was elected in 1932. This was now Roosevelt’s Double Dip Depression. Voices began to speak up suggesting after all Hoover may have known what he was doing, but here, nine years after the Depression began the fundamental condition of the country was no further advanced than it was at the end of Hoover's three-year struggle with it.

The Second New Deal

All during the winter and spring of 1938 a group of young instructors from Harvard and Tufts were busy on a book which they called An Economic Program for American Democracy. which appeared in October, 1938. These instructors had been moving under the guidance of Dr. Alvin H. Hansen,[15] The theory propounded may be briefly stated thus: The expansion of the American economy came to an end in 1929. Before that it had grown for several well-known reasons. (1) There was a rapid increase in population due to free immigration. (2) The frontier was open to entry and exploitation. (3) Technological expansion went forward upon an amazing scale. But all this came an end. Population is no longer increasing save at a small rate. The frontier is gone, having been exploited and settled. Technological advance at the old rate is no longer possible—the great era of revolutionary inventions is over. A basic change had come over the structure of the American economy.

Real Output and Growth remained stagnant throughout the New Deal. By 1938 Unemployment was worse than when FDR took office.[16]

The theory continued: Government spending on the First New Deal had been proved to be a powerful. Too many people made the mistake of supposing that this was a temporary expedient to bring back a self-sustaining economic recovery. Government spending must be not be used as merely a pump primer, but as a permanent additional or auxiliary pump. The old pump—private industry and business—could no longer produce the national income required for a full life. The government had to set up built in stabilizers to maintain prosperity. "The government must assume full responsibility for maintaining national income at a sufficiently high level to assure full utilization of our human and material resource."

This must be done, they insisted, by government spending. "The notion that public spending can he safely resorted to as a temporary emergency device must he abandoned."

Their thesis was as follows. The people do not spend all of the income they receive on consumable goods and services. Each year they save great sums. These savings are thus withdrawn from the function of spending. They must be brought back into the stream of spending some way or the system collapses. The orthodox method of accomplishing this in the past has been through private investment. People who save and who do not wish to spend their money for food or clothes or consumable goods are willing to invest it. If they invest it they put it into what are called capital goods—goods designed to produce other goods such as houses, buildings, machinery, etc. If they do this the money is used to create jobs, experts, technicians, etc., and this gets into the hands of people who will consume it. To keep the capitalist system going there must he a continuous flow of all savings into investment—into new industries and the expansion of old industries. That was considered a perfectly sound theory for many years. It was the basis of the opinion of those who appealed to President Roosevelt in 1933 to adopt a program that would encourage business expansion. Instead the president promoted anti-business rhetoric and class warfare causing uncertainty, and job creation suffered.

The New Deal economists, however, as John Flynn cited, were just learning this important principle. But the Brain Trusters concluded that a continuous flow of savings into private investment was no longer possible. This is possible only when business men wish to borrow funds for new enterprises and expansion of old ones. But this would happen again, they said. Expansion on a sufficient scale in new enterprises and expanding old ones is hopeless because the economy has reached the end of its expansion era, as described above. The only way to avoid the inevitable collapse of the system, they proposed, was for the government to step in and borrow those sums which business refused to borrow and to spend the money on all sorts of welfare, educational, social and other public enterprises.

Government spending had already plunged the nation into debt to the tune of nearly $40 billion. Continuous spending of funds borrowed by the government would mean a continuous expansion of the government debt. Government debt, they argued, is not like private debt. It does not have to be paid. The government can keep it afloat indefinitely by redeeming old bonds with new bonds. Moreover, the interest on the government debt will not be a burden. "The debt is due by the people to themselves," they said. The people owe the debt. The people own the bonds which represent the debt. The government taxes the people to pay the interest on the bonds. It takes the taxes out of the pockets of the people and then pays it back to them in the form of interest. It is just taking it out of one pocket and putting it in the other.

The government therefore need not bother about the size of the debt. It can go on borrowing indefinitely.

At this same time Rex Tugwell and Leon Henderson both admitted that the New Deal spending programs failed. But they insisted it had failed because it had been on a far too modest scale. Instead of spending three billion a year, for which Roosevelt was being condemned, Tugwell said it should have spent twelve billion a year.

Theory of the Permanent Crisis

Making provision for war increased business profits. In 1936 Roosevelt had said, "If we face the choice of profits or peace, the nation will answer – must answer - 'We choose peace'. It is the duty of all of us to encourage such a body of public opinion in this country that the answer will be clear." [17][18] By 1938 Roosevelt embarked on a massive defense appropriations buildup; the Administration would advance 30% to a defense contractor when placing an order. The National City Bank reported an increase of overall business profits in the year 1939 over 1938 of 63.6%, and in its December 1940 Bulletin showed for 284 companies "directly affected by war and defense program" a rise of 79.2%. The Wall Street Journal reported, "Betterment in profits was naturally more pronounced, as a rule, in those industries benefiting directly or indirectly from the European conflict." [19]

On February 28, 1934, Elliott Roosevelt, son of President Franklin Roosevelt, and Anthony Fokker each received half a million dollars for selling fifty military aircraft to the Soviet government.[20]

Curtiss-Wright Aircraft, to enlarge its plant, received a loan of $92 million at 4%. I. F. Stone of The Nation magazine wrote,

"Offered as a non-recourse loan . . . the government would have no claim against the Wright company if it failed to repay the loan. All the government could do in that case would be to take the factory. Since the plant would be financed entirely by the government, the government would really be taking back its own property if the Wright company for some reason wanted to drop it. ...The Wall Street Journal reported on August 2 that while the loan was for $92,000,000, 'the cost of the proposed plant and its equipment is understood to be only $37,000,000 or $38,000,000'. When asked by the Journal correspondent about 'this apparent discrepancy', Jesse Jones said, 'We don't believe it would be in the public interest to break down that total at this time'....As this is being written, the Wright contract has yet to be signed. The company is now asking for five-year amortization instead of eight. Incidentally, a vice-president of this finicky company, T. P. Wright, was assigned to the Defense Commission on June 8 to help speed up production"

The Defense Commission was the same commission that would determine and approve the terms of the loan.[21] PM noted "For an $18,000,000 plant to command a $92,000,000 credit from any bank, including a federal one, may make financiers blink, but that is what has been arranged". The Curtiss-Wright loan was only a little over five times the value of the plant. But Boeing Aircraft, with a plant worth $3,000,000 was awarded a loan of $32,000,000, more than ten times. And Boeing was to own it in five years.[22]


Main article: Keynesianism

1946 DJIA declined 24.6% over 37 months. There was only one crash phase (August–September 1946), and the bottom was hit within 4 months. But the market moved sideways for almost three years and tested the 1946 low area three times. The final time was in 1949, after which the market rose almost without interruption for the next 12 years (160 to 741 in 1961).

Record keeping & construction trades

Record keeping and even economic definitions then were not what they are today. By using the Dow Jones Industrial Average (which is practically the only measurement available in real time that scans the entire period) the Dow did not get back to the level it was at in 1929 until 1949 (160 pts on the Dow). Other economic indexes either did not exist, or were developed later, often by guess work. For example, the oft quotes unemployment rate of 25% which peaked in 1932 is only guess work based upon observations in New York City. No one knows what the real national figures were, or what it actually had been in places like Arkansas or Oklahoma. Gross output figures such as GDP did not exist either.

It was not until 1949 that living standards and peacetime employment returned to something like it was prior to 1929. The New Ordeal is evident today throughout American cities where one can see a distinct gap in the building and construction trades that took place in the decades of the 1930s and 40's. Little was built beyond quonset huts, tin structures with a semi-circular shape and a timber frame underneath. And what was built was either extremely expensive, or built by the government usually for military purposes.

See also

Further reading

  • Road to Serfdom, Friedrich A. Hayek, Reader's Digest Condensed Version, April 1945.
  • The New Ordeal, Freeman Tilden, The North American Review, v. 239, February 1935, p. 131-7.
  • Ordeal by Planning, John Jewkes, Macmillan, New York, 1948. [2]
  • The New Ordeal by Planning, John Jewkes, Macmillan and Co., Ltd., 1968.
  • The Ordeal of Total War, 1939-1945, Gordon Wright, New York, Evanston, and London, Harper & Row, 1968.
  • Franklin D. Roosevelt: The Ordeal, Frank Freidel, Boston: Little, Brown and Company, 1954.


  1. Richard Cockett, Thinking the Unthinkable: Think-Tanks and the Economic Counter-Revolution, 1931–1983, Harper Collins, London 1995, pg. 100.
  2. The Principle of Planning and the Institution of Laissez Faire, Rexford G. Tugwell, The American Economic Review, vol. 22, no. 1, March 1932. [1]
  3. The Roosevelt Myth, Book 3, Ch. 14, John T. Flynn, Fox and Wilkes, 1948.
  4. The Roosevelt Myth, John T. Flynn, Fox and Wilkes, 1948, Book 1, Chapter 4, The New New Deal.
  5. Lawrence H. White, Pre-Keynsian Economic Policy. August 2010.
  6. The Roosevelt Myth, Book 1, Chapter 7, p. 78 An Enemy Is Welcomed, Flynn, 1948.
  7. James Burnham, The Managerial Revolution, Indiana University Press, Bloomingham 1966.
  8. Schumperter continues: "the Russian act of April 4, 1940, concerning the income tax, reveals that incomes as low as 1.812 rubles per year were subject to it. It also reveals the existence of incomes of over 300,000 rubles which were then taxed at the rate of 50 per cent. Now, let us neglect the tax on the lowest incomes entirely and put the modal income in the 1,812–2,400 ruble group at 2,000 rubles; further, let us put the modal retained income in the highest group at no higher than 150,000 rubles (though those 300,000 rubles before tax were a lower limit). Then we discover that the higher of these modes was 75 times the lower one. Even if we put, for 1940, the American equivalent (not of course in purchasing power, but in the sense of equivalent position in the income scale) of the lower mode at as low as $1,000, we shall evidently not find much in the United States income distribution of retained incomes (even apart from the reductions specifically motivated by the requirements of war finance) to support, in the light of the Russian paradigma, the current phrases about atrocious inequalities, “concentration of power” as measured by concentration of income, and the like. The evidence presented in the well-known book by Bienstock, Schwarz and Yugov on Industrial Management in Russia tends to support this view. Many other details point in the same direction, for instance, the fact that those ranges of the professions who could formerly but cannot now afford domestic servants in the United States, do enjoy this privilege—worth a ton of electrical household gadgets—in Russia. All this still fails to take account of advantages that do not pass through income accounts. The power and social position—which is one of the main reasons for valuing a high income—of the industrial manager, especially if leader of the local unit of the Bolshevik party, is far and away above that of an American industrialist. Interesting phenomenon—this Lag of Ideas! Many well-meaning people in this country now profess horror or indignation at social inequalities which did exist fifty years ago, but no longer do. Things change, slogans remain."
  9. New Deal Chorus, Time magazine, pg. 1pg. 2, Jan. 17, 1938.
  10. Daniel Turov, Mixed Message, Barron’s, 21 May 2001, quoted in the Liethner Letter, Issue 1826 June 2001, retrieved 11 June 2007.
  11. League of Nations Monthly Bulletin of Statistics, June, 1936. Percentage change 1929 to March 1936, United States -21.8%, rank number 13.
  12. Two Schemes, Time magazine, Jan. 10, 1938.
  13. Standard Statistics Co., New Money for Operating and Producing.
  14. Midland Bank, London, New Issues for British Companies, converted from £ to $ at $4.8665.
  15. Alvin H. Hansen, Fiscal Policy and Business Cycles, (Norton, 1941).
  16. New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, Harold L. Cole and Lee E. Ohanian, Journal of Political Economy, volume 112 (2004), pages 779–816.
  17. Getting Us into War, Porter Sargent Publisher: P. Sargent, Boston, 1941. No More Millionaires, pg. 372 pdf
  18. Never Let a Crisis Go to Waste, Mario Rizzo, August 10, 2010.
  19. Wall Street Journal, May 3, 1940.
  20. Son's Scheme, Time magazine, Oct. 19, 1936,
  21. Getting Us into War, Sargent, 1941, pg. 433.
  22. Roger Ingersoll, PM, August. 9, 1940.