3 3 A New Deal in Banking and Public Finance
The country needs and unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things that satisfy their needs are within easy reach.1
—Franklin D. Roosevelt, address at Oglethorpe University
Atlanta, Georgia, May 22, 1932
For the first three years of the Great Depression, President Herbert Hoover repeatedly objected to, and occasionally vetoed, public works and work relief programs, calling instead for individual, voluntary, and local aid to the needy.2 He did, however, direct his newly created Reconstruction Finance Corporation (RFC) to channel more than $1 billion to troubled banks, insurance companies, and railroads on the brink of collapse.3 Throughout his 1932 presidential campaign, Franklin Roosevelt criticized this approach as “trickle down” while demanding a recovery program “that builds from the bottom up and not from the top down.”4 As president, Roosevelt would eventually steer many billions of dollars in RFC funds into public works, mortgage modifications for millions of homeowners and farmers, and loans to state and local public school districts for school construction and teacher salaries.5
This was the public option in banking and finance, made exigent by the collapse in private finance. Like the more recent use of a “public option” in health care policy discussions that contemplate a public insurance program to supplement private insurers, when private banking institutions fail to allocate the nation’s credit and capital in a sustainable manner, public institutions could steer resources into relief and recovery.6 This chapter makes the case that such public options in banking and finance were crucial to the successes of Roosevelt’s “bottom-up” approach to recovery. In contrast, President Obama has responded to the most serious economic crisis since the Great Depression with no-strings-attached bank bailouts and indirect stimulus measures that have largely failed to build a sustainable economic recovery.
On the campaign trail, Roosevelt repeated his indictment that the Hoover Administration had encouraged private financial speculation, ignored recovery, delayed relief, and forgotten reform.7 Roosevelt’s New Deal would use a range of policy tools to effectively steer credit and capital away from private speculation and into long-term infrastructure and public works. New federal regulatory agencies would restrict and even prohibit private sector banks from engaging in activities deemed risky, while a parallel system of public banking, flush with resources, would steer credit and capital into the real economy. This changing balance of public and private power was reflected in the shifting priorities of the nation’s Treasury Department and its central bank, the Federal Reserve. The orthodox paradigm was being turned on its head, and as a result, a bottom-up recovery soon began. But the successes of the 1930s were incomplete and limited by Roosevelt’s premature turn to fiscal austerity. It took the World War II economic boom and its aftermath to provide the clearest vindication of the New Deal approach in banking and finance.
As in the 1930s, today the preconditions exist for a new public option approach in banking and finance. In both periods, market failures—the 1929 stock market crash and ensuing collapse in banking, and the 2008 global financial meltdown—were met with bailout strategies that were not capable of sufficiently restoring private credit and investment. The banking crisis in the early 1930s reached a peak on March 4, 1933, the day of Roosevelt’s inauguration, when a nationwide run on the banks led to bank holidays’ being declared in every state of the country. The magnitude of the crisis provided Roosevelt with the political opening to push forward on reform, relief, and recovery efforts. In money and banking, as in some other areas of the New Deal, reform was often at odds with relief and recovery. But there were impressive successes on all three fronts before the window of political opportunity started closing in Roosevelt’s second term.
In 2008, the financial collapse may have been a bit less visible and dramatic than 1933, but it was no less real, as the global system of financial payments and interbank lending became frozen. Instead of images of thousands of people lining up outside the nation’s banks to demand their deposits, the runs on the financial system were now opaque transactions over computer screens, with millions of panic-stricken people and institutions demanding their deposits and redemption of their mutual funds. The Troubled Asset Relief Program (TARP), enacted in the waning days of the Bush Administration, authorized the Treasury secretary to spend up to $700 billion to prop up the financial system.8 Between TARP and the Federal Reserve’s aggressive lending and bond buying programs, the financial system was stabilized—a lesson drawn from the New Deal experience. But with the panic abated, there was less immediate pressure on newly elected President Obama and a Democratic House and Senate to reform the financial system.
The economic contraction was also stopped, both by Obama’s $800 billion fiscal stimulus program and counter-cyclical spending—the so-called automatic stabilizers, such as the federal spending on unemployment compensation that traced back to the New Deal. The recession, technically defined as two consecutive quarters of GDP contraction, was ended. Unfortunately, the recession’s end did not mean that a depression had been avoided. What had made the 1930s the Depression decade was not recession. For most of the decade, there was actual economic growth. But it was a decade of mass unemployment, long-term joblessness, “underwater” consumers, a deleveraging private sector, and public-sector austerity. Much the same conditions face policymakers today. But in 2009, with financial panic averted, complacency set in, and the political window of opportunity quickly closed in Obama’s first term.
The winter of 1933 is often seen as a defining moment in American political history, with the fate of democracy itself perhaps hanging in the balance.9 Many histories of the New Deal begin with the dramatic circumstances of Roosevelt’s first inauguration. Bank holidays had already been declared in every state to stop the contagion of bank runs. Roosevelt’s first act as president was to call Congress into special session and proclaim a four-day national bank holiday that closed down all federally chartered banks.10 The new president had promised action, and the financial emergency provided justification enough for invoking a little-known provision of the Trading with the Enemy Act of 1917, a provision never intended by Congress to apply to these particular circumstances, now used to close the last remaining banks in the country.11 After Roosevelt’s bank holiday proclamation, there was not a bank open for business in the country. For a week, the country survived on local credit, barter, and IOUs amid uncertainty over whether the panic would resume once the banks reopened. During that week, the window of opportunity was opened wide for a range of possible reforms, from federal guarantees of deposits and the issuing of scrip (government IOUs that are not legal tender) to more far-reaching proposals to nationalize the entire banking system.12
As the bank holiday was nearing its end, Congress passed the Emergency Banking Act after barely half an hour of debate, with no committee hearings and few members of Congress having read the bill. (There were very few typewritten copies of the bill.) The House passed the measure with a unanimous shout; the Senate with only seven dissenting votes—the first legislative enactment of the New Deal.13 The Act expanded the capacity of the Federal Reserve to issue new currency backed not solely by government securities, but by any kind of business obligation, and authorized the Federal Reserve to make loans directly to non-member state banks and business enterprises, which was all considered financial heresy at the time.14 It also empowered the Reconstruction Finance Corporation (RFC), an independent government agency established in Hoover’s last year in office, to subscribe to the preferred stock of banks, an approach that would be followed seventy-five years later when the Congress enacted TARP in 2008 to empower the Treasury to purchase financial stakes in private banks and businesses.
As historian David Kennedy has concluded, the Emergency Banking Act was a “thoroughly conservative measure, which had been largely drafted by Hoover administration officials and private bankers.”15 Hoover was nevertheless unwilling to take these steps in his final months in office. TARP was another conservative measure drafted and passed near the end of the Bush Administration, but largely implemented during the beginning of the Obama Administration.
The top officials of both the Roosevelt and Hoover Treasury Departments worked around the clock to get the banks reopened and, according to monetary economist Lester Chandler, “to do so in such a way as to restore confidence in their solvency and liquidity, to prevent further cash withdrawals, to encourage cash to flow back into the system, and to enable the banks to resume their lending function.”16 Federal banking supervisors surveyed the banks and divided them into three categories: those in good condition would be permitted to reopen quickly; the hopeless cases were closed permanently; and those in the middle were not sound enough to open immediately, but were capable of being saved and given help mostly from the RFC. In addition, a temporary deposit-insurance program was instituted to restore confidence in the safety of deposits, a forerunner of the Federal Deposit Insurance Corporation (FDIC) that would be established three months later.17
On the eve of reopening the banks, Roosevelt held the first of his so-called Fireside Chats, a Sunday evening radio address to sixty million people to discuss the banking crisis in terms that could be readily grasped by ordinary citizens. He urged listeners to bring their savings back to the banks where they would be safer than under the mattress. He concluded: “Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work. It is your problem no less than it is mine. Together, we cannot fail.”18
The country had been stranded for days without cash, and heavy withdrawals were expected when the banks opened for business the next morning. Yet, in every city, deposits exceeded withdrawals.19 By the end of March, “$1.2 billion in cash had been redeposited with banks; another $700 million flowed back before the end of the summer.”20 The RFC continued to pump large sums into the banks, while the Federal Reserve engaged in large open-market purchases, buying $600 million in government securities from the banks.21 Soon the banks had reduced their debt to the Federal Reserve from $1.4 billion to only about $100 million late in the year, while amassing about $800 million in excess reserves.22 According to David Kennedy, “The prolonged banking crisis, acute since at least 1930, with roots reaching back through the 1920s and even into the days of Andrew Jackson, was at last over.”23
Raymond Moley, a professor of public law at Columbia University and one of FDR’s original “Brain Trust,” claimed that “the policies which vanquished the bank crisis were thoroughly conservative policies. The sole departure from convention lay in the swiftness and boldness with which they were carried out.”24 It is true that Roosevelt chose not to nationalize the banking system. Such unorthodoxy, according to Moley, would have “drained the last remaining strength of the capitalistic system” at a time when the new administration was seeking to restore the confidence of the conservative business and banking leaders, and through them, of the public generally.25
“Capitalism,” Moley later reflected, “was saved in eight days.”26 But it still remained to be seen what kind of capitalism it would be in the future: a reformed system that was more stable, responsible, and accountable; or one that only temporarily limited the freedom of bankers while leaving the institutional foundations of their powers unchanged.27 The New Deal reforms that would follow were to shift the balance of power between public and private sectors, but it was less certain that the reforms did much to change the self-destructive nature of capitalist institutions, particularly the governance of the big banks and corporations that Washington had to step in and rescue.
Roosevelt apparently saw his reforms in the context of an epic conflict between the state and private finance. In a letter to Colonel E. M. House, who had been President Woodrow Wilson’s closest advisor, Roosevelt himself summed up the increasingly chilly relations between his administration and private financiers:
The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson—and I am not wholly excepting the Administration of W.W. [Woodrow Wilson]. The country is going through a repetition of Jackson’s fight with the Bank of the United States—only on a far bigger and broader basis.28
According to Senator Bronson Cutting of New Mexico, Roosevelt’s “greatest mistake” was his failure to nationalize the banks when given the opportunity on a silver platter. It could have been accomplished, he said, “without a word of protest.”29 The banks had evaded nationalization, and other far-reaching reform proposals would be stymied during the recovery that followed. To critics on the left, Roosevelt had favored large corporations over smaller firms and guaranteed their survival and ever-increasing power. “Measures to help farmers, workers, and the unemployed were merely palliatives that were sufficient to defuse the threat of disorder but insufficient to disrupt corporate prerogatives.”30
A far different critique began developing on the right. Once a leading New Dealer, Raymond Moley broke with Roosevelt within a few years, becoming a conservative Republican and a leading critic of the New Deal. For Moley and others on the right, the eight days that saved capitalism were not enough.31 Jonathan Alter has observed that many wealthy critics of Roosevelt could never admit how close they had come to losing everything. Instead, they would resent and revile the New Deal for taxing and regulating, for disrupting if not reforming the prerogatives of privilege and monopoly.32
Public opinion responded to Roosevelt’s sudden success in stabilizing the banking system. Nearly half a million Americans wrote to Roosevelt in his first week in office. The White House mailroom, which was staffed by a single employee during Hoover’s time, now had to hire seventy people to handle a flood of correspondence.33 Roosevelt took full advantage of his surge in popularity. Within hours, he summoned congressional leaders to the White House and seized the momentum. What followed was the “Hundred Days”—a frenzy of legislative action and reform that is unparalleled in American history.34
Any attempt to assess or even summarize the history of the Hundred Days is fraught with challenges. New Deal reforms were at times contradictory, representing diverse responses to the quite different problems of recovery, relief, and reform of the structures of private and public institutions. One strand of reform focused on rationalizing markets by industry self-regulation to stop the deflationary spiral that had undermined the financial foundations of the economy. Since the 1929 stock market crash, prices and wages had been falling steeply, making it more difficult for households and businesses to meet interest and principal payments on debts that were fixed by contract at the previous, higher levels of wages and prices. The National Industrial Recovery Act (NIRA), a centerpiece of the first New Deal, was intended to stop the deflationary spiral. The Act delegated code-making authority to industry trade councils that were dominated by the largest companies. The industry codes that provided a floor on prices in hundreds of industries were soon criticized as a corporatist approach that was cartelizing the American economy by marginalizing and excluding workers, consumers, and small businesses.
The Agricultural Adjustment Act (AAA), also passed during the Hundred Days and intended to stop the relentless fall in farm prices, provided emergency relief to farmers. It attempted to restore farm income and reduce agricultural surpluses by taxing food processing firms and providing subsidies for farmers to restrict their acreage.35 The AAA was challenged in court as a violation of Congress’s interstate commerce powers for extending federal tax, regulatory, and spending authority to local activities; it was struck down by the Supreme Court in 1936, only to be amended two years later and eventually upheld by the Court.36
The AAA dealt with far more than farm income. Before the bill was enacted, Congress added an omnibus inflationary amendment by Senator Elbert D. Thomas of Utah, which was passed by the Senate by a three to one margin and then by the House by an even heavier majority37—another indication of popular support for attempts to arrest the deflationary spiral in wages and prices. Roosevelt decided to accept the amendment’s permissive powers “that otherwise might later be thrust upon him as mandatory.”38 The Thomas amendment provided the president with six discretionary tools for increasing the nation’s credit and currency, including giving Treasury the authority to issue $3 billion in United States Notes, the same so-called fiat greenback that Lincoln had used to pay for much of the Civil War. In addition, the Federal Reserve was authorized to make another $3 billion in open-market purchases; if it refused, the president was given authority to adopt bimetallism and issue $200 million in silver certificates in payment of debts to foreign governments.39
The emergence of the Thomas amendment reflected a much wider appreciation for the competing methods of currency creation than exists today. The issuance of new currency by either the Treasury (in the form of United States Notes) or the Fed (as Federal Reserve Notes) would provide funds for the administration’s recovery and relief programs. In each case, the newly issued currency would be considered “legal tender” for all debts public and private and would be used to purchase federal government bonds.40 But issuance by the Treasury could reduce overall federal borrowing by retiring government bonds at no cost to the Treasury; in contrast, issuance of currency by the Federal Reserve would merely shift the government’s obligations without reducing the deficit itself. Not surprisingly, the forces of wealth and privilege were aghast at the prospect of greenbacks and silver certificates. Lewis Douglas, the Director of the Budget, lamented the Thomas amendment as “the end of Western civilization.”41 According to the conservative orthodoxy then as today, it would be more prudent to vest the power to issue new currency in the hands of private bankers than in elected officials who might debase the currency for short-term political gain.
Other inflation devices were adopted. The Federal Reserve Board was given the authority to increase or decrease the reserve requirements that must be held by private banks; a reduction in the reserve requirement would allow banks to extend more credit. Roosevelt also abrogated the gold clause in public and private contracts, which went back to the time of the first greenback issuance during the Civil War and was intended to protect creditors by requiring repayment of obligations in gold. As a result of Roosevelt’s decision, some $100 billion in contractual obligations, including most of the $22 billion of federal debt, could now be discharged upon payment of any currency “which at the time of payment is legal tender for public and private debts.”42 In early 1935, the Supreme Court upheld the administration and struck down the gold clauses for interfering with the constitutional power of Congress to determine the value of its money.43
Roosevelt did not ultimately resort to some of the Thomas amendment’s more controversial inflationary tools. Instead, deficit financing and dollar depreciation (by raising the price of gold) were his preferred approaches, along with public works projects that provided millions of people with employment and income, thereby inflating wages and reducing debt burdens. It was a bottom-up approach to recovery that reflected the emerging new paradigm in economics that would be associated with the work of the British economist John Maynard Keynes. When the private sector was stalled and deleveraging, according to Keynesian economics, it was the role of the public sector to put resources back to work, which would in turn have positive feedback effects on consumer spending and business investment.
For millions of people, the most important enactments of the Hundred Days were the public works: jobs programs and relief for the unemployed. This was the public option writ large: the public option in job creation and in financing investment. The Civilian Conservation Corps (CCC), the Federal Emergency Relief Act (FERA), the Public Works Administration (PWA), and the Tennessee Valley Authority (TVA) were the first in an alphabet soup of new agencies and programs that provided relief and jobs to the unemployed, directly through federal programs and in loans and grants to states, while accomplishing tangible and lasting results in terms of regional development, energy and public power, and conservation.44 Within three months of its enactment, the CCC put a quarter million Americans to work in reforestation and flood-control projects in the national parks and forests. Late in the year, Roosevelt diverted funds from the PWA to a new agency, the Civil Works Administration (CWA), which within two months provided jobs to 4.3 million men and women, more than had served in the armed forces during World War I.45
By providing jobs and relief to millions of the unemployed, these public works programs contributed to economic recovery. Consumer purchasing power was expanded by a number of work and relief programs, which in turn helped to improve business confidence and investment. Ben Bernanke, in his Essays on the Great Depression, considers March 1933 the beginning of economic and financial recovery.46 For the first time in four years, commercial and industrial failures began to fall,47 unemployment stopped rising and started to inch downward,48 and commodity prices and the stock market started to rise.49
Roosevelt’s approach, to build up a parallel public banking system, had its antecedents in the wartime administration of Woodrow Wilson.50 But under Roosevelt, the public option in banking and finance was extended with enactment of the Home Owners’ Loan Act, the Emergency Railroad Transportation Act, and the Farm Mortgage Act that created the Farm Credit Administration. Meanwhile, Roosevelt expanded the Reconstruction Finance Corporation well beyond support for banks and insurance companies, and the RFC started making larger loans directly to businesses and industry, providing aid to states and cities, helping the real estate mortgage market, and making disaster relief loans.51 The RFC helped rebuild the building and loan associations, provided funding for federal rural electrification programs, loaned funds to Chicago for teachers’ salaries, and supported numerous public works projects, including the construction of the Brooklyn–Battery Tunnel in New York City, the Pennsylvania Turnpike, the Huey P. Long Bridge in New Orleans, and the San Francisco–Oakland Bay Bridge, to name only a few of the many self-liquidating loans made by the RFC.52
Jesse Jones, the long-time chairman of the RFC, summed up the success of the legislation that extended the RFC authority to provide self-liquidating loans for public works projects:
Today the nation is dotted, from coast to coast and from the Rio Grande to the Great Lakes, with useful monuments to the wisdom of that legislation—great bridges, electric power plants and lines, express highways, waterworks, sewer systems, college dormitories, modern low-rent housing, aqueducts, vehicular tunnels, and other facilities.53
To many of its supporters and detractors alike, the RFC was a “fourth branch of government.”54
In 2011, a new eastern span of the San Francisco–Oakland Bay Bridge was manufactured in China and shipped to Oakland for assembly. California officials claimed to have saved hundreds of millions of dollars by outsourcing this infrastructure project to China.55 State officials apparently were unconcerned about how many jobs were lost or the loss in state revenue from not filling those jobs in California. World Trade Organization (WTO) rules on public procurement tend to make outsourcing of infrastructure that much easier.56 It is a reminder that there are hidden costs incurred as a result of today’s orthodox approaches to public finance and trade—from departing so widely from the New Deal public option approach.
There is no longer a federal RFC to help finance such infrastructure projects and to spur construction and related jobs in the United States. Although Obama has called numerous times for a federal infrastructure bank, it has never been one of his legislative priorities, even though he took office during the worst downturn since the Great Depression, initially had the benefit of control of both houses of Congress, and could have used the example of the RFC to bolster his case for such a bank.57 TARP also could have served as a type of revolving fund that, like the RFC, could have funded public works and jobs programs by providing funds for state infrastructure banks, help for underwater borrowers to refinance and modify their mortgages, and loans to state and local governments to help pay for teachers’ salaries and other essential needs. Unfortunately, the Dodd-Frank Wall Street Reform and Consumer Protection Act of July 2010 (Dodd-Frank) rolled up the TARP program, reduced its spending cap, prevented the Treasury from spending any TARP funds that were received from repayments on earlier TARP loans, and prevented TARP spending for any programs initiated after the enactment of Dodd-Frank.58 This was an unfortunate concession, completely under the radar and shielded from public debate, that left the Obama Administration without a single major policy tool to provide relief and strengthen recovery in the months leading up to the 2010 midterm elections.
Meanwhile, since late 2008, the Federal Reserve has purchased trillions of dollars in bonds from private-sector banks and hedge funds, but there has been no corresponding effort at the Federal Reserve to fund a bottom-up recovery—for instance, by providing funding for state infrastructure banks. In California, such a mechanism was already in place: the California Infrastructure and Economic Development Bank (the I-Bank). But California governor Jerry Brown never sought to expand its funding sources and instead vetoed several measures that would have strengthened the I-Bank, perhaps at the advice of his “Jobs Czar,” a former Bank of America official.59 This approach to infrastructure investment in the United States is unfortunately reminiscent of the pre–New Deal approach of Herbert Hoover.
While the RFC directed financial resources into important public works and private industries, Roosevelt also took measures to steer the nation’s credit and capital away from more speculative activities. During the Hundred Days, FDR signed into law the Truth in Securities Act (the Securities Act of 1933) to protect investors from fraud and misrepresentation, and the Glass-Steagall Act (the Banking Act of 1933) to separate commercial from investment banking.60 The Glass-Steagall Act resulted in the breakup of several of the nation’s largest banks. For instance, J. P. Morgan & Company chose to become a commercial bank, while its underwriting department and partners split off into Morgan Stanley, a newly formed investment bank.61 Both measures were greatly aided by the Pecora Investigation of the Senate Banking Committee, named after Ferdinand Pecora, the fourth and final chief counsel of the investigation that riveted the nation for weeks with testimony about the widespread frauds on Wall Street and evidence of how the banks had been caught up in the speculative mania.62 The dearth of official hearings since 2008 is quite a contrast: a tamped-down Senate committee and the Financial Crisis Inquiry Commission (the Angelides Commission), with only a few days of public hearings to question Wall Street executives.63
The 1933 Securities Act was the beginning of a most significant federal effort to bring transparency to the securities markets. The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC). The Glass-Steagall Act would stand for sixty-six years and would survive numerous attempts by Republicans to repeal it until finally signed away in 1999 by President Bill Clinton, a Democrat. The Banking Act also created the Federal Deposit Insurance Corporation (FDIC) on a temporary basis (later made permanent), thereby establishing federal insurance of bank deposits. Milton Friedman would later call the FDIC the “single most important structural change” in the economy since the Civil War.64 The FDIC was given authority to regulate and supervise all commercial banks for the first time, including state-chartered banks that were not members of the Federal Reserve System.65 It prohibited the paying of interest on checking accounts and limited interest on savings accounts, a reform that helped maintain stability in the banking sector for more than half a century.66
In June 1934, Roosevelt signed into law an amendment of the Federal Reserve Act, a new clause, Section 13(b), that authorized the Fed to “make credit available for the purpose of supplying working capital to established industrial and commercial businesses.”67 This was breaking much new ground for the Federal Reserve by departing from the orthodox view that the Fed should only lend to banks. But the interests of finance and industry were diverging. As the banks relied more and more on Federal Reserve assistance both before and after the bank holiday, and as the private banking sector failed to meet so many pressing financing needs, the administration embraced the unorthodox. For each of the twelve regional Federal Reserve Banks, Section 13(b) created Industrial Advisory Committees consisting of three to five individuals “actively engaged in some industrial pursuit.” The committees were to review loan applications and make recommendations to the regional Reserve banks.68
The 1934 Act opened the floodgates by authorizing the Reserve banks to extend credit to business enterprises “for working capital purposes with permissible maturities of up to five years and without any limitations as to the type of security.”69 The Act also authorized the RFC to engage in commercial lending, another departure from the Hoover Administration, which had limited RFC lending to banks and insurance companies and few other businesses. In total, nearly $280 million were available for such lending by the Federal Reserve, or about 0.43 percent of gross national product (in today’s terms, about $65 billion).70 In the first eighteen months, the Fed would make nearly 2,000 loans totaling about $124 million, a sizable boost to the economy. The RFC, with fewer restrictions, would lend much more to Main Street.
While much of Roosevelt’s New Deal was ad hoc experimentation, the Hundred Days contained the framework for a new paradigm in public finance and financial regulation—a framework that would be followed throughout Roosevelt’s thirteen years in office. The primary objective of this paradigm was to shift the balance between private and public sectors in the allocation of credit and capital. Regulation would limit the freedom of bankers and impose greater transparency on the markets, provide stability to the private financial sector, and thereby reduce the need for government bailouts and subsidies in the future. The RFC, the Federal Reserve, and other parallel public banking institutions would boost investment in infrastructure and public works projects. The resulting job creation and income support would reduce private-sector debt burdens, thereby contributing further to banking sector stability and recovery. Reform, relief, and recovery were mutually reinforcing.
Not uncommon is the argument that Roosevelt’s legislative successes were owed to large Democratic majorities in Congress, an argument that is often offered as an explanation of why similar reforms are not possible today. This interpretation, however, overlooks Roosevelt’s ability to bring public opinion to bear on members of both parties. Although Democrats in 1933 commanded the House by a wide margin and had 60 of 96 Senate seats, their ranks included a large number of Southern conservative Democrats.71 Roosevelt’s ability to move legislation through Congress and to maintain Democratic party discipline while pulling more liberal Republicans on board lay partly in the progressive populist appeal of his policies. He also understood that the moment for reform could end quickly and that he had to strike while the iron was hot.72
Roosevelt’s success in 1933 suggests that a newly elected president’s power may be at its zenith soon after election, particularly when succeeding a failed presidency in an atmosphere of crisis.73 Throughout the Hundred Days, Roosevelt rode a wave of public enthusiasm while shaping popular opinion. He called Congress into special session, gave ten major speeches, sent fifteen messages to Capitol Hill demanding immediate action on specific problems, and Congress passed fifteen major laws. As Nathan Miller concluded:
Most of the measures were controversial; some were of doubtful constitutionality. But Roosevelt had no intention of making a revolution or creating a new institutional structure for the nation. Rather, he was attempting to cure the temporary ailments of a capitalist society and to nurse it back to health. Experimental cures were being tried only because the conventional nostrums no longer worked.74
The achievements of the Hundred Days were rewarded by another landslide victory for Roosevelt in the 1934 midterm elections. Democrats gained nine Senate seats, more than enough to break any filibusters, which at the time required a two-thirds vote.75 Reform, relief, and recovery—including massive public works and jobs programs—were all good politics. This stands in stark contrast to the history of Obama’s first term, where he shied away from relief and recovery efforts after the one-shot stimulus, watched the agenda slip from his grasp with each successive adjournment of Congress, and subsequently lost the 2010 midterm elections to a Tea Party wave that rode the crest of populist impatience and anger.
Roosevelt followed up on the success of the 1934 congressional elections with the “Second Hundred Days,” another burst of legislative activity that included some of the New Deal’s most important reforms: the Social Security Act and the National Labor Relations Act (the Wagner Act). It also included further relief and recovery efforts. The Emergency Relief Appropriations Act authorized Roosevelt to create a new federal relief agency. The Works Progress Administration (WPA) would employ another 3.2 million at its peak, including Ronald Reagan’s father, Jack, as a local director, as well as Reagan’s older brother, Neil.76 The WPA built thousands of schools, hospitals, highways, and airfields across the country, while providing work for many thousands of unemployed writers, actors, artists, and musicians. The National Youth Administration (NYA) employed about 1.5 million young men and women, often in part-time jobs that kept them in school.77 It is easy to appreciate that millions of Americans who found hope and dignity in New Deal jobs programs, and many of their loved ones, would feel strong, even mystical connections to Roosevelt. Ronald Reagan would vote for Roosevelt four times.78
The range and scale of the New Deal public works programs were enormous and a telling contrast to President Obama’s approach, which has relied almost exclusively on repeated tax holidays and tax credits to try to spur private-sector job creation. From the beginning of his first term, Obama stated that the public sector cannot create jobs, that only the private sector can be the engine of job creation.79 Austan Goolsbee, the chairman of his Council of Economic Advisers, went unchallenged in his view that the public sector has never created a single job. With such a mindset, it would hardly seem to matter how large a majority the Democrats had in the House and Senate during Obama’s first two years.80 In accepting a trickle-down approach to recovery and appointing economic advisors with this view, the Obama Administration undermined its own popularity and the public approval that would come with successful public-sector job creation. The result was the 2010 midterm election fiasco and a hopelessly divided Congress that would keep the agenda fixed on austerity and deficits into Obama’s second term.
Roosevelt and Obama took diametrically opposite approaches to the sequencing of reforms.81 Relief and jobs programs were the essence of the New Deal: a new social contract between the American people and their government. To many, reform could sometimes look like rearranging deck chairs on the Titanic, while relief and recovery were more real and personal, even if consisting simply of a temporary job and cash enough to pay for the necessities. By providing relief in the form of public works and jobs programs and boosting recovery with public banking facilities like the RFC in his first two years, Roosevelt was rewarded in the 1934 midterm elections with larger majorities in Congress that allowed him to move forward on more far-reaching reforms in 1935, such as Social Security. In contrast, the Obama Administration propped up the banks without providing the relief of public works and jobs programs. Instead, in his first two years, Obama moved forward with his signature health care reform (which gave up a public option in health insurance), a measure that invited the Tea Party backlash, contributed to the 2010 election losses, and thereby made future relief and reform efforts that much more difficult.
Roosevelt’s Second New Deal included other important structural changes. The Public Utilities Holding Company Act of 1935 brought the nation’s electric utility companies under federal regulation, including provisions to force divestitures and break up the concentration of an industry that was mostly controlled by eight large conglomerates.82 This reflected the anti-monopoly and anti-trust impulse in the administration’s reform efforts—efforts that were often impeded by the administration’s recovery priorities and later, the war effort.83
The Banking Act of 1935 owed much to Marriner Eccles, Roosevelt’s chairman of the Federal Reserve Board. Eccles was a banker and industrialist, a Mormon from Utah, who testified along with dozens of other bankers to the Senate Finance Committee in early 1933, just prior to Roosevelt’s inauguration.84 He was the only witness who departed from calls for austerity and balanced budgets, and he quickly got the attention of the incoming administration. His ideas on public works projects, deficit financing, and demand stimulus anticipated Keynesian economics.85 After serving briefly as an aide to Treasury Secretary Henry Morgenthau, Jr., Eccles was appointed by Roosevelt to chair the Federal Reserve Board. Like many of Roosevelt’s appointments to regulatory agencies and Cabinet posts, Eccles was not a captive of Wall Street or big business interests.86 Although a Republican who had voted for Hoover, Eccles was guided by the principle that “laissez faire in banking and the attainment of business stability are incompatible” and that the only remedy was “conscious and deliberate control” of banking and finance by federal regulation.87
The Banking Act of 1935 reformed the structure of the Federal Reserve System. Eccles and the administration had proposed making the chairman and vice-chairman of the Federal Reserve Board removable at will by the President. Other proposals sought by the administration and key members of Congress included proposals for a unified central bank, a national monetary authority, government ownership of the regional Reserve banks, and a policy declaration granting the Federal Reserve more regulatory control over private banking and finance.88 None of these was included in the final bill. Instead, the administration’s influence was further diminished by the removal of the Secretary of the Treasury and the Comptroller of the Currency as ex officio members of the Board.89 However, the Board’s power was enhanced in several ways. The presidents of the regional Federal Reserve Banks, each of whom sat on the Fed’s Open Market Committee (FOMC) that conducts monetary policy, now had to be approved by the Board, although only after election by the directors of their regional banks. The FOMC would now consist of the seven Federal Reserve Board governors (appointed by the President for fourteen-year terms), along with the twelve regional Federal Reserve Bank presidents (only five of whom could vote on the FOMC at any one time). In addition, the Board was given authority to double the reserve requirements for member banks.90
As long as Eccles was Board chairman, the Roosevelt Administration would have tremendous influence on Federal Reserve policies. The Banking Act made it a stronger Federal Reserve, but, unfortunately, one that could more easily be co-opted by the private banking interests once Eccles was gone. It was an example of structural reform that left in place an undemocratic structure that, with the passage of time and changes in leadership, could become anti-democratic (openly hostile to the fiscal and regulatory policies of the administration and Congress). The failure to reform the most troubling features of institutional structures that had caused financial calamity and depression would threaten stability and prosperity in the future.
Roosevelt ran for reelection in 1936 on the strength of his massive public works projects and jobs programs, financed by the emerging system of public banking institutions. Once again, it proved to be good politics. He won by a record eleven million votes, more than 60 percent of the popular vote, and an Electoral College landslide of 523 to 8. The Democrats picked up another seven Senate seats for a total of 76 of 96 Senate seats, and another twelve House seats for a total of 331.91 It was the most dominant position of any administration in modern American political history.
With such commanding majorities in both houses of Congress, Roosevelt made two major missteps. The first was his plan to pack the Supreme Court, a proposal that proved highly unpopular. The Judiciary Reorganization Bill, introduced early in 1937, would have allowed Roosevelt to appoint an additional justice to the Supreme Court for every sitting justice over the age of 70, six of the justices at the time. Although the Constitution does not limit the size of the Supreme Court, Roosevelt’s plan came under sharp attack in Congress and from Bar associations and the public.92
Roosevelt had been frustrated through 1936 by a series of Supreme Court decisions striking down some of the most important New Deal programs, including the National Industrial Recovery Act (NIRA), the Agricultural Adjustment Act, and the Railroad Retirement Act. A unanimous Court rejected the NIRA industry trade councils and industry codes as violations of the commerce clause, as well as the private non-delegation doctrine (preventing delegation of law-making authority to private entities).93
There was concern about what would come next, perhaps a constitutional attack on Social Security or some other popular and vital New Deal program. By the time NIRA was struck down in 1935, its strategy of setting a floor under prices and wages by limiting production was well in retreat. Limiting production would not grow the economy and create jobs. Keynesian demand-side strategies were quickly supplanting the NIRA approach. Perhaps the Court did the New Deal a favor by striking NIRA down.
Roosevelt backed away from his Court-packing plan, and the Supreme Court backed away from its obstruction and began upholding major New Deal programs in five to four decisions. Since then, the Court has routinely upheld the authority of administrative agencies through a more expansive interpretation of the Commerce Clause, while largely ignoring the delegation challenges as long as Congress provides some intelligible principle in the delegation.94 John Hart Ely, in Democracy and Distrust, lamented the demise of the non-delegation doctrine as a “death by association” with pre-1937 substantive due-process decisions and narrow readings of the Commerce Clause: “when those doctrines died the non-delegation doctrine died along with them.”95
Ever since, there has been a nagging, persistent scholarly critique of this lack of judicial scrutiny of democratic processes—a critique that is more easily ignored than refuted. Theodore Lowi derided Congress’s habit of making overly broad delegations to administrative agencies.96 How much worse it is when the delegation is made to private self-interested parties. Alan Brinkley has argued that an anti-populist critique of deliberative democracy is visible in the “extraordinary, and largely unchallenged, authority of presumed experts on the Federal Reserve Board to chart the course of our economy.”97 Unfortunately, the Banking Act of 1935 only further entrenched the Federal Reserve’s problematic institutional structure, which looks much like a NIRA trade council.
Roosevelt’s failed attempt to cloak private cartels with the protection of public law is strangely tied to the rise of cartels in more recent decades. Some would say that the Federal Reserve is “the poster child of an unconstitutional private delegation.”98 Like the NIRA, the Federal Reserve is dominated by private actors. The presidents of the regional Reserve banks participate on the Fed’s Open Market Committee and are appointed by privately selected regional board members.99 Meanwhile, unlike other public agencies, the Federal Reserve does not rely on Congress for budgetary appropriations, since it is effectively able to print money. In addition, the Federal Reserve is exempt in whole or in part from much of the tapestry of administrative procedural requirements that apply to most other federal agencies.100
There have been numerous challenges to the Federal Reserve since Roosevelt’s time, most notably in the 1970s and 1980s, on private non-delegation and Appointments Clause grounds claiming that its regional Reserve Bank presidents are federal officers who should be appointed by the President and confirmed by the Senate, rather than selected by private boards of directors dominated by the big banks. All have been dismissed on narrow procedural grounds by the gatekeepers on the U.S. Court of Appeals for the D.C. Circuit, and the Supreme Court has denied certiorari.101
Those who praise the New Deal for its wise policies in banking regulation and public finance often ignore its shortcomings on reform, arguably including the role of the Banking Act of 1935 in entrenching the fox in the henhouse. Over the past two decades, evidence has mounted that suggests the Federal Reserve is largely in the hands of powerful private financial institutions and their representatives. There are occasional progressive voices in the Fed, either on the Board of Governors or in the regional Reserve banks, but those are too often marginalized or ignored within the Fed itself. This may explain why the Federal Reserve failed to regulate or supervise the declining lending standards of the biggest banks prior to the 2008 crash. It also helps explain why the Fed under Ben Bernanke appeared to be in no rush to exercise its full authority to lend to business enterprises and infrastructure projects as it did under the enlightened leadership of Marriner Eccles in the 1930s and 1940s. Instead, it preferred to confine its largesse to purchasing bonds from its banking and hedge fund clientele.
Roosevelt’s second major misstep so soon after his landslide reelection was his decision to cut spending in 1937, a foolhardy attempt to balance the budget, or at least reduce the deficit, by reducing spending on work projects and relief programs. He was siding with his Treasury Secretary, Henry Morgenthau, Jr., against the advice of his Fed chairman, Marriner Eccles, who counseled more spending, not less.102 In 1937, federal spending was reduced by more than five percent from the previous year.103 Appropriations for the WPA were cut from $689 million to less than $500 million; there were also huge cuts in spending on agricultural adjustment and defense programs.104 Unfortunately, these cuts happened to coincide with the first year of payroll tax collections for Social Security and the Federal Reserve’s own misstep. In fearing inflation in commodity markets, the Fed raised reserve requirements too quickly.105 The payroll tax reduced consumer and private-sector spending, while the higher reserve requirements contributed to a squeeze of private credit.
What followed was the Roosevelt recession, an economic contraction beginning in 1937 that exceeded in severity (though not in longevity) the downturn following the 1929 stock market crash.106 It was Roosevelt’s greatest economic failure as president, and for the first time it took the wind out of the sails of reform. Manufacturing output fell by nearly 40 percent; the unemployment rate, which had been reduced from 25 percent when Roosevelt took office to 14 percent in 1937, jumped back up to 19 percent.107
Even before Roosevelt’s turn to austerity in 1937, the state and local government sector was in decline. For most of the 1930s, fiscal austerity and an anemic private sector undermined the tax base and reduced tax revenues for all levels of government, making it more difficult to provide needed relief. The federal government could borrow, but state governments had to keep raising taxes and cutting spending because they did not have sufficient access to the bond markets and often had constitutional mandates to balance their budgets. According to E. Cary Brown, the macroeconomic effects of the federal New Deal stimulus of public works and jobs programs were largely erased by the aggregation of spending cuts and tax increases at the state and local levels.108 That is why New Deal spending was so important yet insufficient throughout the 1930s and why it took much larger federal spending in World War II to finally end the Depression.109
The resulting economic downturn became a significant political liability. The 1938 midterm election was a huge defeat for the Democrats, who lost seven Senate seats and 70 House seats.110 They still had large majorities in each house that, however, included conservative Southern Democrats who would impede reform. Obama’s turn to fiscal austerity in 2010 is reminiscent of Roosevelt’s 1937 blunder. Roosevelt waited four years to make such a mistake: productive years in terms of reform, relief, and recovery. Unfortunately, Obama turned to austerity in his second year as president, slowing the recovery and contributing to a political backlash in the 2010 midterm elections.
The politics of Obama’s shift from stimulus to austerity are confusing. In January 2010, the Senate rejected a proposal for a commission on fiscal consolidation and deficit reduction by a vote of 53 to 46, with six Republican co-sponsors voting against it after Obama announced his support for such a commission.111 Among the Republican co-sponsors who voted against the commission were several of the most conservative senators. But barely two weeks later, Obama created the Commission on Fiscal Responsibility and Reform by executive order, and named as the co-chairs of the Commission Alan Simpson, a leading Republican deficit hawk, and Erskine Bowles, a leading Democratic deficit hawk and member of numerous corporate boards, including top financial firms such as Morgan Stanley.112
Obama could easily have created a commission on economic recovery and jobs, but instead he turned to a deficit-reduction agenda. The Commission on Fiscal Responsibility and Reform was a gift to Republicans, one of many self-inflicted wounds by Obama’s turn to austerity. However, as Obama’s reelection indicates, many of his constituents have suffered far more than Obama’s political fortunes. The Commission could have played out much differently if he had appointed two Progressives as co-chairs, perhaps Keynesian economists like Joseph Stiglitz or Paul Krugman (both Nobel laureates), or politicians on the left of the spectrum—people who would recognize the need to reduce the deficit by putting people back to work, starting with the public sector, rather than trying to reduce the deficit by cutting expenditures and laying off the tax base. But Obama’s appointments of Simpson and Bowles, as well as many key officials in the Treasury department and the Federal Reserve, reflects a strongly conservative bias and an acceptance of a pre–New Deal and pre-Keynesian orthodoxy, particularly foolish during a time of massive long-term unemployment, ongoing deleveraging, and a stagnant recovery. With the creation of the Commission, the national discourse shifted quickly from stimulus to austerity, which in turn helped close off political possibilities for more active government responses to the economic crisis.
Instead of public works and jobs programs in 2010 (a time when the Democrats still had working majorities in both houses of Congress), Obama presided over premature spending cuts.113 Federal government employment, as a percentage of the population, fell to its lowest level since before the 1950s.114 The federal budget did not sufficiently come to the aid of state and local government finances, which took a nosedive as in the 1930s, because of the collapse in state and local tax revenues in 2008 and 2009.115 More than half a million state and local government workers lost their jobs in Obama’s first term.116 Schoolteachers, police officers, firefighters, and many other public-sector occupations witnessed massive job cuts and hiring freezes.117 The decline in public-sector jobs did not help the private sector. Direct federal spending cuts meant declining revenue for private-sector government contractors and lower aggregate spending by consumers (through a reverse multiplier effect).118
If the 1934 and 1936 elections were proof that public works and jobs programs can be politically popular in a depression, 2010 is evidence that forgoing such public options can be a political loser. Although fiscal and monetary stimulus and bank bailouts had averted a worse crisis, the official unemployment rate was higher in 2010 than when Obama first took office.119 While voter turnout fell in the midterm election, for Democrats it fell by ten million more than for Republicans. According to ABC News exit polls, more than four out of every ten people who had voted for Obama in 2008 did not bother voting in 2010, a decline of more than 29 million votes.120 Democrats lost control of the House of Representatives, lost their filibuster-proof majority in the Senate, and lost all hope of a workable recovery and reform agenda.
Roosevelt’s failed experiment in austerity was short-lived. In the last nine months of 1938, he once again boosted federal spending, including funding for the WPA. The recovery began in mid-1938, but employment would not regain the 1937 level until the United States entered World War II. The Federal Reserve chairman, Marriner Eccles, was still defending public spending as the means for economic recovery and business prosperity, but the 1938 midterm election results and shifting public opinion were beginning to undermine support for new relief and reform.
It was not too long before the drums of war, sounding across the ocean, were having salutary effects on the U.S. economy. In 1940, Britain was in dire need of American arms and supplies and fast running out of money. The U.S. Neutrality Act required belligerents to pay cash for arms, and loans were prohibited to nations like Britain that had not paid their debts from World War I. Roosevelt solved the problem with a “flash of genius”: the United States would lend or lease the supplies and equipment to Britain in return for British overseas military bases that Britain could ill afford to defend.121 The Lend-Lease program eventually provided more than $50 billion worth of American supplies to Britain and other allied nations. U.S. foreign military assistance provided a dramatic stimulus to American industry and labor, which were increasingly reoriented into military production. The Lend-Lease boom was a portent of even bigger changes to come for the U.S. economy.
It has been suggested that each generation rewrites history to suit its own ends.122 The history of the New Deal, particularly in money and banking, seems to follow such a pattern. In the early post–World War II period, in the heyday of corporate liberalism when organized labor was near the zenith of its power and influence, the dominant view was to see the New Deal as a great epoch of reform that was stalled by its pragmatic compromises with corporate power and its failure to solve the problem of unemployment.123 In more recent years, as private finance and corporate power extended its reach at home and abroad, the New Deal legacy in banking and finance was turned on its head and largely swept aside. Such a sea change in policy required a kind of historical amnesia, a “creative forgetfulness” and rewriting of New Deal history.124
It is common to hear conservative critics of Roosevelt point out that the New Deal did not end the Depression, that it was World War II that finally brought it to an end, as if that somehow discredits the New Deal Keynesian precepts of active fiscal policy, public works and jobs programs, and public options in banking.125 Of course, the reverse is much more accurate. The war brought a fiscal revolution. In the first six months of the war, the federal government placed over $100 billion in orders for war contracts, thereby demanding more goods than the economy had ever produced in a single year.126 The portion of the economy devoted to war production more than doubled in 1942—from 15 to 33 percent of the economy. Total wartime spending was more than $320 billion, twice as large as all previous federal spending in the history of the Republic combined.
The dramatic increase in federal spending translated directly into an enormous economic boom.127 The nation’s gross national product (GNP) grew from $99.7 billion in 1940 to $211.9 billion in 1945. The mobilization of resources—human, industrial, technological, and financial—exceeded the efforts of all other belligerents combined. By any measure, World War II was the most impressive economic expansion in American history, with real (inflation-adjusted) economic growth rates exceeding 15 percent a year during the war’s three peak years and averaging double digits throughout the war.
War came to the rescue of the American economy. By the end of the war, the jobless rate was 1.2 percent. A hyperactive fiscal policy had ended the Great Depression. It confirmed the Keynesian prescription that higher levels of government spending can bring higher growth rates, just as the 1937 recession confirmed the futility and dangers of cutting government spending in a weak economy.
There were fears that the war’s end would bring another depression.128 Sixteen million American military personnel would be returning to the civilian economy. How would they be employed, and by whom? Would wages fall as a result of an oversupply of labor? Was a debt deflation about to harm borrowers and threaten banks and financial institutions yet again?
As the end of the war approached, Congress passed the Servicemen’s Readjustment Act of 1944, the so-called G.I. Bill of Rights, to assist newly returning veterans with jobs, training, education, and health care, and low-cost business loans and home mortgages. In the G.I. Bill, one could see shades of so many New Deal programs, now all wrapped into one.129 The war’s mass conscription now translated in peacetime into the basis of a Keynesian full employment and social policy on a grand scale. Conscription spread the G.I. Bill’s benefits to an enormous portion of the population, nearly one-quarter of the civilian workforce. More than sixteen million new veterans benefited from subsidized low-interest mortgage loans and tuition-free university education, along with living stipends.130 Veterans received more than $13 billion for education and training, a significant part of the federal budget. Higher education boomed, and the domestic economy continued to boom.
Peter Drucker considered the G.I. Bill of Rights to be perhaps the most important single event of the twentieth century, signaling an important shift to a technologically advanced “knowledge society.”131 According to historian Michael Bennett, there would not have been the political support for a Marshall Plan if sixteen million Americans and their families had not successfully readjusted to civilian life thanks to the G.I. Bill.132 The Marshall Plan and other U.S. foreign aid programs in turn helped rebuild, on democratic foundations, war-torn economies throughout Western Europe and Japan, a powerful inoculation against any turn to either communism or fascism.
The Marshall Plan was the largest peacetime foreign aid program in U.S. history, consisting of more than $13 billion in grants (rather than loans) between 1947 and 1951. This also represented about 13 percent of the total U.S. budget, the equivalent of more than $400 billion today (compared with recent U.S. foreign aid budgets, which are barely $50 billion a year and 1.5 percent of the federal budget).133 It was a huge spending program, and it had an immediate, positive impact: recipient countries experienced economic growth rates of nearly 40 percent over the next four years; and the U.S. economy, already getting a shot in the arm from the G.I. Bill, now got a double dose from the Marshall Plan’s boost in exports, manufacturing, and employment.
Throughout the 1940s, in both wartime and post-war, the Federal Reserve and the RFC continued to channel credit into the real economy (i.e., into actual industries that produced tangible goods, as opposed to the paper economy of Wall Street). The Fed made sure Treasury could borrow and spend at near-zero interest rates. The RFC, following the New Deal public investment model, more directly pumped billions of dollars into investments in defense plants, building 2,300 factories at a cost of more than $9 billion dollars.134
The decade of the 1940s provides vindication of the role of big government in a modern mass industrial economy. This active role necessarily extended to money and finance. The 1940s decade turned all the metrics in public finance upside down. Federal spending and borrowing quickly grew to enormous levels, compared to both the 1930s and the present time. In 2012, federal spending was about 25 percent of GDP; in the 1940s it peaked at nearly 45 percent. In 2012, the federal debt held by the public was about 70 percent of GDP; in the 1940s, it peaked at over 114 percent. In the 1940s, the federal deficit peaked at more than 30 percent of GDP; in 2012 the federal deficit was about 8 percent of GDP (in Greece, after 2008, it peaked at little more than 10 percent of GDP). Although the 1940s may be taken as a vindication of military Keynesianism, far more could be accomplished in terms of employment and quality of life if the same level of resources were invested in the civilian economy.135
The higher spending and borrowing levels of the 1940s did not coincide with rising inflation or rising interest rates precisely because of the New Deal legacy in financial regulatory reform and the public option in banking. Of crucial importance was the administration’s control of the central bank. From 1942 to 1951, the Federal Reserve was directed by the White House and Treasury to peg interest rates at three-eighths of one percent on short-term Treasury debt and 2.5 percent on long-term Treasury debt. During this so-called pegged period, it was the Federal Reserve’s duty to purchase government securities in any amount and at any price needed to maintain the interest rate pegs.136
Since 2008, the Federal Reserve has purchased trillions of dollars in Treasury securities and mortgage-backed securities, also to keep interest rates low on Treasury debt and the rest of the U.S. economy. Yet the recovery has been slow and tepid. The Fed’s monetization of debt has propped up the balance sheets of banks and helped the stock market,137 but at the same time, federal spending is actually being pinched by the turn to austerity. Without public works and jobs programs, long-term unemployment remains disturbingly high. Meanwhile, the slow growth economy and its lagging tax receipts contribute to ongoing government deficits, resulting in more calls for spending cuts and budget austerity.
In his Essays on the Great Depression, Ben Bernanke described how the Federal Reserve’s bond-buying programs in the 1930s left the banks with excess reserves without stimulating recovery. He credited this insight to Milton Friedman and Anna Schwartz: that the growing level of liquidity created an illusion of easy money, and that, in reality, lenders were shifting away from making loans, in large part because of the continued weakness of debtors (often upside-down and out of work). The banks instead preferred to hold safe and liquid investments: government securities.138 Likewise, today the banks have amassed more than $1.5 trillion in excess reserves, thanks also to the Federal Reserve’s quantitative-easing programs of purchasing bonds from those banks. And once again, the banks are propped up but not lending sufficiently to finance a vibrant economic recovery, for much the same reasons of mass unemployment and the deleveraging of consumers and businesses.
Bernanke’s view of the Depression seemed to be marked by selective amnesia. If one lesson of the Great Depression is that the Federal Reserve must be ready to expand the money supply (Bernanke’s main point), another lesson that he did not seem to recognize is that monetary expansion alone will not renew growth for the economy when consumers and businesses are underwater, there is mass unemployment, and people’s liquidity preferences are elevated because of weak confidence in the economy.139 In the 1930s, Marriner Eccles said that, under such conditions, the use of monetary policy is like “pushing on a string.” He argued that a far more active fiscal policy was necessary, that tax cuts are also limited in effectiveness in such an environment, and therefore that public works projects are of paramount importance.
Although the Federal Reserve was monetizing a significant amount of Treasury debt in the 1940s, the Treasury was spending such funds on gigantic projects that resulted in full employment: the war, the G.I. Bill, and the Marshall Plan. Instead of the 1930s’ liquidity trap, in the 1940s there was booming confidence, and the Federal Reserve’s focus had to shift from prodding banks to make loans to restraining them instead from extending credit for speculative purposes. But thanks to New Deal banking law reforms, the Federal Reserve and other federal agencies used their authority to set margin requirements and minimum down-payments on loans for stock purchases, real estate, automobiles, and consumer durable goods.140 The modern administrative state was able to prevent any hyperinflation of consumer prices or asset markets during the greatest economic boom in the nation’s history.
If the economic policies and performance of the 1940s stand as a vindication of the New Deal’s Keynesian approach to economic recovery, that analysis must be tempered with the realization that the New Deal left unfinished much of its ambitious reform agenda. Alan Brinkley has written about the assumptions of early New Deal reformers: “that the nation’s greatest problems were rooted in the structure of modern industrial capitalism and that it was the mission of government to deal somehow with the flaws in that structure.”141 Large corporate enterprises were seen as particularly problematic and requiring institutional reform at several levels, including reform of corporate governance and more robust anti-trust policy to rein in the cartels that were exploiting consumers, workers, and taxpayers. According to Brinkley, the rapid economic recovery and expansion during World War II reduced the impetus for anti-trust and other reforms, while the war-planning bureaucracy itself helped entrench the self-regulation of big business.142
For instance, both Congress and the Securities and Exchange Commission (SEC) considered proposals to reform corporate governance to make management more accountable to the interests of shareholders and other stakeholders. In 1934, congressional concern extended to deficiencies in the federal proxy rules that allowed corporate insiders to control the process of electing corporate directors. It was not until 1942 that the SEC proposed a rule to require corporations to include shareholder-nominated director candidates in their proxy statements, but the SEC proposal was roundly criticized by corporate management as unworkable, confusing, and potentially costly to the war effort, so the SEC abandoned the proposal.143 While in postwar Europe, corporate governance would be reformed to enhance the voice of various corporate constituencies, such as workers and consumers, in the U.S., large private-sector corporations became more hierarchical and less accountable to non-management and non-shareholder interests. U.S. corporate elites would preside over industries that were increasingly cartelized after the 1970s and therefore increasingly profitable. The corporate pie would be divided more unequally than in the past, with top management and shareholders claiming larger shares at the expense of rank-and-file workers, consumers, and taxpayers.
As the U.S. economy expanded in the war and post-war periods, there was a general amnesia in American politics about the need for structural reforms. The watering down of anti-trust efforts coincided with a retreat from state economic planning. Corporate elites would fill the vacuum. For instance, in the late 1940s, General Motors, Firestone Tire, Greyhound Bus, Mack Truck, and Standard Oil of California colluded in creating front companies that bought up more than a hundred electric trolley, rail, and bus lines around the country. Each of these companies enjoyed a dominant position in increasingly cartelized and oligopolistic industries. Together, they formed a super cartel that would remake cityscapes and transportation patterns across the nation. After taking control of previously public-transit systems, they promptly shut down the electric trolley lines and replaced them with gas-powered buses.144 The railcars and tracks from the Los Angeles electric rail system (at the time the largest system in the country) were simply dumped in the ocean. Los Angeles and a hundred other cities and locales were increasingly motorized at the expense of air quality and the quality of life; commuters would pay more, and corporations would reap bigger profits. The General Motors–led cartel was also a disturbing portent of the dangers of private planning when the public sector surrenders all voice and all public options.
In time, corporate dominance would shift from such industrial cartels (oil, steel, and autos, for instance) to a cartel in banking and finance with global reach. After the nation-building period of the G.I. Bill and Marshall Plan, the RFC was allowed to lapse, and the Federal Reserve scaled back its lending to non-bank business interests. Public options in banking and finance were in retreat. In 1951, with Eccles no longer serving as chairman of the Federal Reserve, but still serving as a Fed governor, the Federal Reserve rebelled against Treasury and White House control. What followed was the Federal Reserve–Treasury Accord of March 1951, by which the Fed regained its control over monetary policy and the setting of interest rates. It was a far cry from the New Deal proposals to bring the central bank under government ownership and control.
As the Federal Reserve fortified its independence from the political branches of government, it increasingly became the captive of the private financial and banking interests that owned and directed the regional Reserve banks. A couple of dozen big banks, their satellite hedge funds and interrelated credit ratings agencies, located primarily in seven wealthy countries (the G-7 countries), would receive guidance and protection from “independent” central banks.
The amnesia about New Deal reform crossed party lines. In 1999, as noted, Bill Clinton, a Democratic president, signed away the Glass-Steagall Banking Act of 1933 that had kept commercial banks out of the “casino economy” for more than half a century. During that time, banking and finance were generally far less risky industries. From the 1930s through the 1970s, there were only 198 U.S. bank failures, an average of fewer than six bank failures a year, resulting in about $124.3 million in FDIC losses. Deregulation changed everything. By the late 1980s, there were hundreds of bank failures a year, and the savings and loan industry collapsed, at much larger cost to taxpayers. The end of Glass-Steagall and the deregulation of derivative financial markets in late 2000 (in Bill Clinton’s final month in office) let the genie out of the bottle.145
By the end of the Clinton era, the entire financial system was turning on its head. Without public options in banking, the public sector was increasingly starved of resources. On a per capita basis, federal civilian employment fell to its lowest levels since the 1950s. With regulation of banks and financial markets reduced, the financial system became far riskier. The New Deal model in banking regulation and public finance gave way to industry self-regulation and speculative financial markets. By the twenty-first century, it was common, and for good reason, to refer to the distribution of wealth, income, and power as resembling a New Gilded Age. This set the stage for the 2008 financial collapse, the most significant meltdown in banking and financial markets since 1929 and the early 1930s.
In 1933, as in 2008, private finance had utterly collapsed into the hands of the state, which chose to prop up the banks with public funds in each case. In 1933, it was the RFC that pumped capital into the banks; in 2008 and 2009, it was the TARP bailout fund that bought non-voting stakes in the banks. In both periods, the Federal Reserve provided massive help with few strings attached. In neither period were structural changes imposed on the management of the subsidized banks. But at least during the New Deal, the propped up institutions of capitalism were supplemented and at times supplanted by more effective and accountable government institutions.
Despite the several big responses by the Bush and Obama administrations to the financial and economic collapse of late 2008—the Troubled Asset Relief Program (TARP), the American Recovery and Reinvestment Act (ARRA) of early 2009, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of July 2010—none of these measures showed much learning from the experience of the New Deal in the 1930s and 1940s. In fact, each showed how little was learned from the successes and shortcomings of the New Deal era. TARP funds were used to keep big banks afloat, but without sweeping out the actual bankers who had made such terrible decisions. The few-strings-attached nature of TARP suggested a view that what was good for Wall Street was good for the United States. But there were large costs in propping up the banks with taxpayer funds without bringing them under government control. The banking élites were able to continue with many of the same speculative financial practices, while using their corporate treasuries to lobby Congress and the administration to limit reforms. There was also a significant political cost, as the TARP bailout helped fuel the Tea Party backlash in the 2010 midterm elections.146
Although the Obama stimulus provided direct employment for several hundred thousand people, these jobs were mostly already in the pipeline. Obama called them “shovel-ready” jobs for construction projects that had already reached a point of planning where workers could be quickly employed to begin work.147 In contrast, Roosevelt’s public works programs were not shovel-ready in the same sense—instead, they provided jobs (and in the case of the CCC, actual shovels) for unemployed Americans who had no prospects, and they started new projects that had not previously been on the drawing board. Moreover, the size and duration of Obama’s stimulus was far too small and short-lived for the magnitude of the crisis facing the American economy, and the design was flawed by not focusing on direct job-creation.148
The Dodd-Frank Act delegated authority for new regulations to many of the same federal departments and agencies that were largely captured and staffed with Wall Street operatives. In late 2012, Treasury Secretary Timothy Geithner was able to exempt foreign exchange swaps and forwards from the rules under the Dodd-Frank Act that were intended to reduce risk and increase transparency in derivative markets. The exemption would protect a four-trillion-dollar-a-day global market and one of the largest sources of derivatives-trading revenue for the biggest banks.149
In restricting the ability to use TARP for any future industrial lending, the Dodd-Frank Act curtailed the administration’s ability to finance any new public works projects or jobs programs. After the House fell under Republican control in late 2010, the Obama Administration turned increasingly to an austerity agenda. With the elected branches unable to agree on budgets and arguing over extension of the debt-ceiling limit, the Federal Reserve played a larger role in trying to nurse a recovery. The Fed’s quantitative easing programs pushed trillions of dollars in newly created money into the banks, but too little trickled down to the real economy and to real job creation.
There are several factors that explain Obama’s failure to follow up on the successes of financial stabilization with a more vibrant agenda of reform. Prior to his election, and since, Obama’s top advisors on economic and finance issues were people with Wall Street ties. Obama all too readily accepted their perspective that the public sector cannot create jobs, thereby ruling out public works as well as the public option in banking.150 Likewise, Obama accepted the “free trade” and laissez-faire assumptions that globalization, trade, and capital flows could not be slowed, regulated, or taxed.151 With the exception of his initial “stimulus” in early 2009, Obama’s approach to the problems in private and public finance often resembled Hoover’s trickle-down approach, and like Hoover’s, was an insufficient impulse for action.
One of Obama’s momentous decisions was to reappoint Ben Bernanke to chair the Federal Reserve. Bernanke had been a Republican appointee (first as chair of President George W. Bush’s Council of Economic Advisers, and then as Fed chairman), and he was averse to having the Federal Reserve intervene beyond helping Wall Street. Since the 1930s, the central bank had the authority under Section 13(3) of the Federal Reserve Act to open its discount window to non-bank enterprises “in unusual and exigent circumstances.” The Dodd-Frank Act retained the Fed’s Section 13(3) authority to lend directly to individuals, partnerships, and corporations in unusual and exigent circumstances, but only if it were part of a program or facility with “broad-based eligibility.”152 For the Federal Reserve to establish a broad-based facility or program, it would first have to obtain permission from the Treasury Secretary, and at least five members of the Board of Governors would have to agree with the credit advance.153 It was easy to imagine a number of programs or facilities with broad-based eligibility that could help pull the economy out of its slow-growth trajectory while providing relief and jobs to millions of unemployed, including: loans to federal agencies for public works and infrastructure projects; loans to state infrastructure banks for capital investments; loans to or purchases of mortgages from Fannie Mae and Freddie Mac and other lenders for the objective of modifying mortgages; or loans to or purchases from holders of student loans, also to modify loan repayments. Unfortunately, it was far more difficult to imagine a Federal Reserve willing to assert its Section 13(3) authority to finance such a recovery program.
In the fall of 2008, as credit and capital markets froze across the world and as large banks and financial institutions teetered on the brink, there was hope for change. But throughout Obama’s first term, very little changed in terms of the dominant models and approaches to banking regulation and public finance. New regulations were either piecemeal or delegated to the captured agencies for drafting and implementation. Most significantly, doors were closed on public options in banking, in turn closing the door on possibilities for significant infrastructure investment, public works, and jobs programs. Trickle-down was the dominant strategy across the board, an unfortunate contrast with the approach of Franklin Roosevelt, who recognized that any sustainable recovery must be a bottom-up recovery that provides jobs and better wages and incomes to ordinary folks. Roosevelt understood that such a recovery depended on an active public sector to lead the way, through institutions like the Reconstruction Finance Corporation, to underwrite a large and comprehensive program of infrastructure investment and public works. Roosevelt’s New Deal approach in financial regulation and public finance provides a lodestar for today’s troubled economy.
1. Franklin D. Roosevelt, Address at Oglethorpe University, Atlanta, Georgia, May 22, 1932; quoted by Kirsten Carter in “Bold, Persistent Experimentation,” in Roosevelt History, Oct. 22, 2010, FDR Presidential Library and Museum blog, accessed July 20, 2013, available at http://fdrlibrary.wordpress.com/tag/digital/.
2. Broadus Mitchell, Depression Decade: From New Era Through New Deal, 1929–1941 (New York: Holt, Reinhart and Winston, 1947), 87.
3. David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945 (New York: Oxford University Press, 1999), 84.
4. Nathan Miller, FDR: An Intimate History (New York: Signet, 1983), 262.
5. Mitchell, Appendix IX, 442; Jesse H. Jones, Fifty Billion Dollars: My Thirteen Years with the RFC (New York: MacMillan, 1951).
6. Timothy A. Canova, “The Public Option: The Case for Parallel Public Banking Institutions,” New America Foundation, June 2011, available at http://www.newamerica.net/publications/policy/the_public_option.
7. Miller, 285.
8. Andrew Ross Sorkin, Too Big to Fail (New York: Penguin Books, 2009), 507.
9. Jonathan Alter, The Defining Moment: FDR’s Hundred Days and the Triumph of Hope (New York: Simon & Schuster, 2006), xiii.
10. FDR’s bank holiday proclamation suspended all banking transactions, embargoed all gold and silver shipments, prohibited hoarding, and made violations punishable by a fine of $10,000 or ten years’ imprisonment. Franklin D. Roosevelt, “Proclamation 2039—Declaring Bank Holiday,” March 6, 1933. Gerhard Peters and John T. Woolley, The American Presidency Project, accessed July 20, 2013, available at http://www.presidency.ucsb.edu/ws/?pid=14661. FDR took office on Saturday, March 4th, and the proclamation was made effective just after midnight on Monday, March 6th, so as to keep from profaning the Sabbath; Miller, 309.
11. A year later, the U.S. Supreme Court would uphold a state’s emergency legislation that imposed a moratorium on foreclosures in the face of a constitutional challenge. “Emergency does not create power,” wrote Chief Justice Hughes. “Emergency does not increase granted power [or] diminish the restrictions imposed upon power [granted]. While emergency does not create power, emergency may furnish the occasion for the exercise of power.” Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934).
12. Miller, 309.
13. Kennedy, 135–136.
14. Mitchell, 134.
15. Kennedy, 136.
16. Lester V. Chandler, The Economics of Money and Banking, 5th ed. (New York: Harper & Row, 1969), 464.
17. Ibid.
18. Miller, 311; Kennedy, 136.
19. Miller, 311.
20. Chandler, 464.
21. Ben S. Bernanke, Essays on the Great Depression (Princeton, NJ: Princeton University Press, 2000), 62.
22. Chandler, 464.
23. Kennedy, 137.
24. Raymond Moley, After Seven Years (New York: Harper & Brothers Publishers, 1939), 155. According to one congressman at the time: “The President drove the money-changers out of the Capitol on March 4th—and they were all back on the 9th.” Alter, 251.
25. Moley, 155; Miller, 311; Alter, 251.
26. Moley, 155; Miller, 311.
27. Broadus Mitchell feared “that an economic system which had come so near to self-destruction was scarcely worth the passionate loyalty” expressed by Moley. Mitchell, 136.
28. Franklin D. Roosevelt, F.D.R.: His Personal Letters, ed. Elliott Roosevelt (New York: Duell, 1947–1950), 373; Miller, 249, 334.
29. Alter, 230.
30. Anthony J. Badger and William Hughes, FDR: The First Hundred Days (New York: Farrar Straus & Giroux, 2009), 163.
31. An eight-day week may have been enough for Roosevelt to save capitalism, but it was apparently not enough to show he cared about the capitalists.
32. Alter, 231.
33. Kennedy, 137. “Thereafter mail routinely poured in at a rate of four to seven thousand letters per day.”
34. Miller, 313.
35. Ibid., 314.
36. The Court struck down the Agricultural Adjustment Act of 1933 on a restrictive commerce clause analysis in United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477 (1936). Six years later, the Court upheld the 1938 Agricultural Adjustment Act with a more expansive commerce clause reading, in Wickard v. Filburn, 317 U.S. 111, 63 S. Ct. 82, 87 L. Ed. 122 (1942).
37. Mitchell, 137.
38. Ibid.
39. Ibid.
40. Ibid.
41. Ibid.
42. Ibid., 138.
43. Norman v. Baltimore & Ohio Railroad Co., 294 U.S. 240 (1935); Mitchell, 138.
44. Miller, 315–316; Kennedy, 144.
45. Miller, 339.
46. Bernanke, 62.
47. Mitchell, Appendix, 439.
48. Charles P. Kindleberger, The World in Depression, 1929–1939 (Berkeley, CA: University of California Press, 1973), 233.
49. Ibid., 221.
50. The New Deal approach to public finance had its antecedents in Wilson’s War Finance Corporation, a new federal credit institution that helped finance railroads, banks, and utilities. Jordan A. Schwartz, The New Dealers: Power Politics in the Age of Roosevelt (New York: Vintage, 1993), 18. According to Schwartz, the Wilsonians also “abhorred socialism or unwarranted intervention in the marketplace, but when capital was timid or crisis threatened, bold and visionary men in Washington recalled that government itself was enterprise.… Thus began the emergence of American state capitalism” (p. 14).
51. Jones, 146–152, 173–205.
52. Ibid., 163–172, 203–205, 211–213.
53. Ibid., 163.
54. “Brother, Can You Spare a Billion? The Story of Jesse H. Jones,” PBS, accessed July 20, 2013, available at http://www.pbs.org/jessejones/jesse_bio3.htm. According to the Saturday-Evening Post, “Next to the President no man in the Government and probably in the United States wields greater power,” accessed July 20, 2013, available at http://www.pbs.org/jessejones/index.htm. Roosevelt reportedly came to calling Jones “Jesus H. Jones.” Merle Miller, Plain Speaking: An Oral Biography of Harry S. Truman (New York: Berkley Books, 1974), 196.
55. David Barboza, “Bridge Comes to San Francisco with a Made-in-China Label,” New York Times, June 26, 2011, A1.
56. Lori Wallach, “U.S. Foreign Economic Policy in the Global Crisis,” Statement by the Director of Public Citizen’s Global Trade Watch to the Subcommittee on Terrorism, Nonproliferation and Trade, Committee on Foreign Affairs, U.S. House of Representatives, March 12, 2009, accessed July 20, 2013, available at www.citizen.org/documents/WallachTestimony031209.pdf. The Agreement on Government Procurement that is currently in force was part of the Clinton administration’s trade liberalization agenda. It was signed in Marrakesh on April 15, 1994 at the same time as the Agreement Establishing the World Trade Organization and was entered into force on January 1, 1996. “Overview of the Agreement on Government Procurement,” Trade Topics: Government Procurement, World Trade Organization (Washington, D.C. 2013), accessed July 20, 2013, available at http://www.wto.org/english/tratop_e/gproc_e/gpa_overview_e.htm.
57. Michael Likosky, Obama’s Bank: Financing a Durable New Deal (New York: Cambridge University Press, 2010), 7–18.
58. Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, P.L. 111–203 (July 21, 2010), Section 1302 (amending Section 115(a) of the Emergency Stabilization Act of 2008), accessed July 20, 2013, available at www.gpo.gov/fdsys/pkg/PLAW-111publ203/.../PLAW-111publ203.pdf.
59. In 2011, Governor Jerry Brown vetoed AB 750, a bill to create a commission on chartering a state-owned bank; he would also veto bills to enhance the authority of the I-Bank. Adam Weintraub, “Calif. Gov Names Retired BofA Exec as Jobs Adviser,” Associated Press, August 18, 2011, accessed July 20, 2013, available at http://news.yahoo.com/calif-gov-names-retired-bofa-exec-jobs-adviser-143916977.html.
60. Miller, 315–317.
61. Matthew Josephson, The Money Lords: The Great Finance Capitalists 1925–1950 (New York: Webright and Talley, 1972), 173.
62. Michael Perino, The Hellhound of Wall Street (New York: Penguin Press, 2010), 4–7; Mitchell, 154–157.
63. The Financial Crisis Inquiry Report, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Washington, DC: U.S. Government Printing Office, 2011), accessed July 20, 2013, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC.
64. Alter, 305 (quoting Friedman).
65. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, for National Bureau of Economic Research, 1963), 434–440.
66. Timothy A. Canova, “The Transformation of U.S. Banking and Finance: From Regulated Competition to Free-Market Receivership,” Brooklyn Law Review, 60 (1995): 1295, 1298–1303.
67. David Fettig, “Lender of More Than Last Resort,” Federal Reserve Bank of Minneapolis, December 2002, 15, accessed July 20, 2013, available at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3392.
68. In 1932, Hoover had reluctantly agreed to an amendment in a highway construction bill (ten days after vetoing similar legislation) that granted the Federal Reserve the authority to lend directly to “individuals, partnerships, and corporations” (therefore, not solely to banks), but only in “unusual and exigent circumstances.” With the Fed’s rather orthodox leadership at the time, the power was used sparingly: “Just 123 loans were made over four years” by all twelve regional Reserve banks, totaling about $1.5 million; the largest single loan was for $300,000. The Emergency Banking Act of 1933 authorized similar loans to non-banking corporations by the regional Reserve Banks, but such loans had to be secured by direct obligations of the United States, and the loans were limited to 90-day advances. Fettig, 18–19.
69. Ibid., 19 (quoting Howard Hackley’s useful but out of print Lending Functions of the Federal Reserve [Washington, DC: Board of Governors of the Federal Reserve System, 1973]); Hackley was the Board’s General Counsel.
70. Ibid., 45.
71. David Woolner, “How Obama Can Fight Back: FDR, the ‘Populist Backlash’ and the 1934 Election,” Roosevelt Institute, accessed July 20, 2013, available at http://www.rooseveltinstitute.org/new-roosevelt/how-obama-can-fight-back-fdr-populist-backlash-and-1934-election; The American Heritage Book of the Presidents, Vol. 10 (New York: Dell Publishing, 1967), 898.
72. As Senator Burton Wheeler put it, in early March 1933, Congress would “jump through a hoop” if Roosevelt asked: Miller, 313. But only for a time, and FDR knew to take advantage of the moment.
73. Nathan Miller pointed out that “honeymoon” circumstances assisted Roosevelt: “Hoover was an easy act to follow. The country was at rock bottom, with no place to go but up.” Because of the financial crisis, the honeymoon was more intense than usual. Miller, 314 (quoting Robert E. Sherwood).
74. Miller, 318–319.
75. In 1975, the Senate reduced the number of votes required for cloture from two-thirds to three-fifths, or sixty of the current 100 senators.
76. “Ronald Wilson Reagan, Life before the Presidency,” American President: A Reference Resource, Miller Center, University of Virginia, accessed July 20, 2013, available at http://millercenter.org/president/reagan/essays/biography/2. According to some accounts, “the family would have starved” had Reagan’s father Jack and older brother Neil not obtained employment with the Federal Emergency Relief Administration. William Kleinknecht, The Man Who Stole the World: Ronald Reagan and the Betrayal of Main Street America (Philadelphia: Perseus Books, 2010), 37.
77. Miller, 367–369.
78. “Reagan, Life,” supra note 76; Kleinknecht, 37.
79. “The Myth of Job Creation,” New York Times, October 22, 2012, A22.
80. “Scarecrow’s Nightmare: Austan Goolsbee Defends President Romney’s Economic Plan,” Firedoglake.com (FDL), June 5, 2011, accessed March 25, 2013, available at http://my.firedoglake.com/scarecrow/2011/06/05/austan-goolsbee-defends-presidents-romneys-economic-plan/; “Colbert or Goolsbee: Who’s the Clown?” Institute for Public Accuracy, June 6, 2011, accessed March 25, 2013, available at http://www.accuracy.org/release/colbert-or-goolsbee-whos-the-clown/
81. Empirical evidence suggests that the success of a policy may often depend on the correct sequencing of reform, perhaps putting wider social interests ahead of the interests of capital markets in the policy queue. Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose, “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence,” International Monetary Fund, March 17, 2003, 5, accessed July 20, 2013, available at http://www.imf.org/external/np/res/docs/2003/031703.pdf. The authors conclude that financial integration should be approached cautiously, with the pace and sequencing of integration dependent on country-specific circumstances and institutional features. (Rogoff was the IMF Chief Economist and Director of Research at the time of the report.)
82. Leonard S. Hyman, America’s Electric Utilities: Past, Present and Future (Vienna, VA: Public Utilities Reports, 1988), 74; Mitchell, 173.
83. Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Vintage Books, 1995).
84. Investigation of Economic Problems, Hearings Before the Committee on Finance, United States Senate, 72nd Congress, 2nd Sess., Pursuant to S. Res. 315, Feb. 13–28, 1933, 703–733 (Washington, DC: U.S. Government Printing Office, 1933), available at Federal Reserve Bank of St. Louis, accessed July 20, 2013, available at http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf.
85. Marriner S. Eccles, Beckoning Frontiers: Public and Personal Recollections, ed. Sidney Hyman (New York: Alfred A. Knopf, 1951); Sidney Hyman, Marriner S. Eccles: Private Entrepreneur and Public Servant (Stanford, CA: Graduate School of Business, Stanford University, 1976).
86. Conrad Black, Franklin Delano Roosevelt: Champion of Freedom (New York: Public Affairs, 2003), 260. Black concluded that Roosevelt was “very leery of big industrialists, financiers, and corporate lawyers” in making his Cabinet appointments.
87. Mitchell, 168.
88. Ibid., 171.
89. Ibid., 168–169.
90. Ibid., 169.
91. The American Heritage Book, 898–899.
92. “Franklin Delano Roosevelt’s ‘Court Packing’ Plan,” United States Senate Committee on the Judiciary, Recess Reading, accessed July 20, 2013, available at http://www.judiciary.senate.gov/about/history/CourtPacking.cfm.
93. A. L. A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 550 (1935). Justice Cardozo, in his concurring opinion, characterized the delegation to the private industry trade council as a “delegation running riot.” Ibid., 553.
94. John Hart Ely, Democracy and Distrust: A Theory of Judicial Review (Cambridge, MA: Harvard University Press, 1980), 132.
95. Ibid., 132–133.
96. Theodore J. Lowi, The End of Liberalism: The Second Republic of the United States, 2nd ed. (New York: W.W. Norton, 1979), 96–97.
97. Alan Brinkley, “The Challenge to Deliberative Democracy,” in The New Federalist Papers: Essays in Defense of the Constitution, Alan Brinkley, Nelson W. Polsby, and Kathlen M. Sullivan, eds. (New York: W.W. Norton & Co., 1997), 23, 25.
98. Timothy A. Canova, “Black Swans and Black Elephants in Plain Sight: An Empirical Review of Central Bank Independence,” Chapman Law Review, 14 (2011): 237, 301. John Hart Ely is credited for the colorful description.
99. The Federal Reserve System: Its Purposes and Functions, 2nd ed. (Washington, DC: Board of Governors of the Federal Reserve System, 1947), 53–54, 62–64.
100. See Freedom of Information Act, 5 U.S.C. Section 552(b)(5), providing exemptions for certain Federal Reserve directives and information that are part of its deliberative process; Federal Advisory Committee Act, 5 U.S.C. App. Section 4(b) (2007), exempting any advisory committee of two entities, the Federal Reserve System and the Central Intelligence Agency.
101. Melcher v. Federal Open Market Committee, 836 F.2d 561 (DC Cir. 1987), dismissed on grounds of equitable discretion; Committee for Monetary Reform v. Board of Governors of the Federal Reserve System, 766 F.2d 538 (DC Cir. 1985), dismissed for lack of standing; Riegle v. Federal Open Market Committee, 656 F.2d 873 (DC Cir. 1981), dismissed on grounds of equitable discretion; Reuss v. Balles, 584 F.2d 461 (DC Cir. 1978), cert. denied, 439 U.S. 997 (1978), dismissed for lack of standing. When the plaintiff has been a U.S. Senator, the court has created the doctrine of “equitable discretion” to avoid ruling on the substantive merits. If standing and justiciability are somehow found in a future challenge (perhaps for a private financial institution or state government plaintiffs), the next roadblock could be redressibility.
102. Brinkley, The End of Reform, 15, 23–28.
103. Mitchell, 43. Federal spending was reduced from $8.47 billion in 1936 to $8 billion in 1937.
104. Ibid., 44.
105. Ibid., 21–22, 43–44.
106. Brinkley, The End of Reform, 23.
107. Kennedy, 350.
108. E. Cary Brown, “Fiscal Policy in the ‘Thirties’: A Reappraisal,” American Economic Review, 46 (December 1956): 857–79; Christina D. Romer, “What Ended the Great Depression?” Journal of Economic History, 52 (December 1992): 757–784.
109. For most of the 1930s, fiscal policy was a wash; about the only real federal stimulus was monetary, in the form of dollar devaluation and gold inflows. Romer, 757–784.
110. The American Heritage Book, 899.
111. “McConnell reverses position on Conrad-Gregg budget commission,” Tampa Bay Times, February 1, 2010, accessed July 20, 2013, available at http://www.politifact.com/truth-o-meter/statements/2010/feb/01/mitch-mcconnell/mcconnell-reverses-position-conrad-gregg-budget-co/.
112. Executive Order 13531—National Commission on Fiscal Responsibility and Reform (Washington, D.C.: White House, February 18, 2010), accessed July 20, 2013, available at http://www.whitehouse.gov/the-press-office/executive-order-national-commission-fiscal-responsibility-and-reform.
113. The foolishness of austerity should have been as apparent in 2010 as it was in 2008, and the history of 1937–1938 should have been clear. Canova, “Massive Stimulus.” May Be Needed to Stem Crisis,” Wall St. Journal, Real Time Economics, October 22, 2008, accessed March 25, 2013, available at http://blogs.wsj.com/economics/2008/10/22/massive-stimulus-may-be-needed-to-stem-crisis
114. Ezra Klein, “John Boehner’s Funny Numbers,” Washington Post Wonkbook, February16, 2011, accessed March 25, 2013, available at http://voices.washingtonpost.com/ezra-klein/2011/02/john_boehners_funny_numbers.html. “In 1953, there was one Federal worker for every seventy-eight residents. In 1989, there was one Federal employee for every 110 residents. By 2009, the ratio had dropped to one Federal employee for every 147 residents. The picture that emerges is one of a Federal workforce that has significantly shrunk compared to the overall U.S. population, as well as compared to the size of Federal expenditures and the work that the Federal Government is called upon to perform.” Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012 (Washington, DC: Office of Management and Budget), 103, accessed July 20, 2013, available at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/spec.pdf.
115. State revenue fell by 11.8 percent from 2008 to 2010, and states faced budget shortfalls in the range of $291 billion for fiscal years 2009 and 2010, and more than $100 billion in fiscal year 2011. Analytical Perspectives: Budget of the U.S., 279.
116. Travis Waldron, “Last Three Years Were Worst on Record for Public Sector Job Losses,” Think Progress, April 9, 2012, accessed March 25, 2013, available at http://thinkprogress.org/economy/2012/04/09/460380/worst-ever-public-sector-job-loss.
117. Unfortunately, neither Bar associations nor government agencies seem to keep statistics on public-sector job losses for lawyers. It seems clear to observers of the legal job markets that hiring freezes and layoffs have resulted in thousands of fewer jobs across the country in the wide range of public-sector offices that employ lawyers (including district attorneys, public defenders, environmental enforcement, and many regulatory agencies at all levels of government).
118. The authors of a January 2013 International Monetary Fund Working Paper, Olivier Blanchard (the IMF’s chief economist) and David Leigh, “deduced that IMF forecasters have been using a uniform multiplier of 0.5, when in fact the circumstances of the European economy made the multiplier as much as 1.5, meaning that a $1 government spending cut would cost $1.50 in lost output.” Howard Schneider, “An Amazing Mea Culpa from the IMF’s Chief Economist on Austerity,” Washington Post WonkBlog, January 3, 2013, accessed March 25, 2013, available at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/03/an-amazing-mea-cul pa-from-the-imfs-chief-economist-on-austerity. In this IMF Working Paper, the authors also accepted findings by Alan Auerback and Yuriy Gorodnichenko that U.S. “fiscal multipliers associated with government spending can fluctuate from being near zero in formal times to about 2.5 during recessions.” Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers,” IMF Working Paper WP/13/1 (Washington, DC: International Monetary Fund, January 2013), 4.
119. “Labor Force Statistics from the Current Population Survey,” Databases, Tables & Calculators by Subject (Washington, DC: Bureau of Labor Statistics), accessed July 20, 2013, available at http://data.bls.gov/timeseries/LNS14000000. The official U.S. unemployment rate rose from 7.8 percent in January 2009 when Obama took office, to 9.8 percent in November 2010, the month of the midterm elections (it peaked at 10.0 percent in October 2009).
120. “Obama’s No-Shows: 29 Million,” ABC News, November 3, 2010, accessed March 25, 2013, accessed July 20, 2013, available at http://abcnews.go.com/blogs/politics/2010/11/obamas-no-shows-29-million.
121. Miller, 460.
122. Eric Foner, “Preface,” in Who Owns History? Rethinking the Past in a Changing World (New York: Hill and Wang, 2002), xi.
123. Alonzo L. Hamby, “Introduction,” in The New Deal: Analysis and Interpretation (New York: Webright and Talley, 1969), 1, 4–8.
124. Foner,, xii–xiii, quoting Friedrich Nietzsche.
125. Amity Shlaes, The Forgotten Man: A New History of the Great Depression (New York: Harper Perennial, 2007).
126. Timothy A. Canova, “Democracy’s Disappearing Duties: The Washington Consensus,” Chapter 11, in Yoav Peled, Noah Lewin-Epstein, Guy Mundlak, and Jean L. Cohen, eds., Democratic Citizenship and War (London: Routledge, 2011), 202.
127. Lynn Turgeon, The Advanced Capitalism System: A Revisionist View (Armonk, NY: M.E. Sharpe, 1980), 47.
128. Lynn Turgeon, Bastard Keynesianism: The Evolution of Economic Thinking and Policymaking Since World War II (Westport, CT: Greenwood Press, 1996), xv, 8.
129. Glenn C. Altschuler and Stuart M. Blumin, The G.I. Bill: A New Deal for Veterans (New York: Oxford University Press, 2009), 6–9.
130. In passing the G.I. Bill of Rights, Congress had learned from the mistakes of the past, when World War I veterans were forgotten and ignored. When the veterans’ “Bonus Army” encamped in the Capitol demanding their pensions, President Hoover sent in the Army with guns and bayonets to burn down their makeshift village. Paul Dickson and Thomas B. Allen, The Bonus Army: An American Epic (New York: Walker & Co., 2005).
131. Peter F. Drucker, Post-Capitalist Society (New York: Harper Business, 1993), 3.
132. Michael J. Bennett, When Dreams Came True: The GI Bill and the Making of Modern America (Herndon, VA: Potomac Books, 1999). See also Robert Sobel, The Great Boom 1950–2000 (New York: St. Martin’s Press, 2002); Suzanne Mettler, Soldiers to Citizens: The G.I. Bill and the Making of the Greatest Generation (New York: Oxford University Press, 2005).
133. “Foreign Assistance and the U.S. Budget,” Center for Global Development, Washington, DC, accessed July 20, 2013, available at http://www.cgdev.org/page/foreign-assistance-and-us-budget.
134. Jones, 315.
135. Robert Pollin and Heidi Garrett Peltier, “The U.S. Employment Effects of Military and Domestic Spending Priorities,” Working Paper 51 (Amherst, MA: Political Economy Research Institute, University of Massachusetts, October 2007), accessed July 20, 2013, available at http://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1122&context=peri_workingpapers.
136. Chandler, 482. In addition, federal income tax rates were at an all-time high during the 1940s, with the statutory top marginal tax rate over 90 percent. Yet the economy performed brilliantly. Thomas L. Hungerford, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates since 1945,” CRS Report for Congress (Washington, DC: Congressional Research Service, Sept. 14, 2012).
137. The Fed’s bond-buying program has had other tangible benefits for the bankers. By propping up the balance sheets of big banks, it allowed top management to quickly repay their TARP funds, thereby allowing them to evade the TARP-imposed limits on executive compensation that had reached historic levels. It also allowed these banking CEOs to remain in office where they would continue to use corporate resources to lobby Congress and the administration against reform.
138. Friedman and Schwartz, 449–462.
139. Canova, “Massive Stimulus.”
140. Timothy A. Canova, “Financial Market Failure as a Crisis in the Rule of Law: From Market Fundamentalism to a New Keynesian Regulatory Model,” Harvard Law & Policy Review, 3 (2009): 369.
141. Brinkley, The End of Reform, 5.
142. Ibid., 118, 189–190.
143. Jill E. Fisch, “From Legitimacy to Logic: Reconstructing Proxy Regulation,” Vanderbilt Law Review,. 46 (1993): 1129, 1162–1164.
144. Russell Mokhiber, Corporate Crime and Violence: Big Business Power and the Abuse of the Public Trust (New York: Random House, 1988), 221–228.
145. Timothy A. Canova, “Legacy of the Clinton Bubble,” Dissent (Summer 2008): 42, 45–47, 50.
146. The Tea Partiers objected to the bailout on ideological grounds. As proponents of laissez-faire, many of them thought the market should have allowed the troubled banks to fail.
147. Manuel Roig-Franzia, “Obama Brings ‘Shovel-Ready’ Talk into Mainstream,” Washington Post, January 8, 2009, accessed March 25, 2013, available at http://articles.washingtonpost.com/2009-01-08/news/36771075_1_shovel-ready-obama-plugs-obama-era.
148. At its peak, the American Recovery and Reinvestment Act may have directly employed more than 700,000 Americans on construction projects, research grants, and other contracts. “That number doesn’t include the jobs saved or created through its unemployment benefits, food stamps, and other aid to struggling families likely to spend it; its fiscal relief for cash-strapped state governments; or its tax cuts for more than 95 percent of workers. Top economic forecasters estimate that the stimulus produced about 2.5 million jobs and added between 2.1 percent and 3.8 percent to our gross domestic product.” Michael Grunwald, “Five Myths about Obama’s Stimulus,” Washington Post, August 10, 2012, accessed July 20, 2013, available at http://articles.washingtonpost.com/2012-08-10/opinions/35492297_1_stimulus-recovery-act-tax-cuts. If true, that the stimulus directly and indirectly created 2.5 million jobs, that would be barely a quarter of U.S. jobs lost in the wake of the 2007–2008 Great Recession.
149. “A Step Back for Derivatives Regulation,” New York Times editorial, November 20, 2012, A26.
150. “The Myth of Job Creation,” New York Times editorial, October 21, 2012, A22; Institute for Public Accuracy, “Colbert or Goolsbee: Who’s the Clown?”
151. Barack Obama, The Audacity of Hope (New York: Three Rivers Press, 2006), 174–175. Obama seems to equate any tariff (presumably, even a multilateral tax on financial transactions) with doomed protectionist efforts to slow globalization. The speed of globalization is a flawed analogy. If the problem is that globalization is off course, then it is the direction, not the speed, that must be corrected by regulatory strategies of control.
152. Sections 1104 and 1105 of Dodd-Frank, discussed in Weil, Gotschal & Manges LLP, “Financial Regulatory Reform: An Overview of The Dodd-Frank Wall Street Reform and Consumer Protection Act,” 7, Financial Regulatory Reform Center, accessed March 25, 2013, available at http://financial-reform.weil.com/recent-posts/financial-regulatory-reform-overview/#axzz2HSt7SVYe.
153. In addition, the Reserve bank extending the credit must show that such credit was not available elsewhere: Fettig, 47. The FDIC Improvement Act of 1991 amended Section 13(3) of the Federal Reserve Act to allow the Federal Reserve to lend directly to securities firms during times of emergency. The Federal Reserve would flirt with these powers throughout the 1970s and even into the 1990s.