A Depression That Wasn’t

President Franklin Roosevelt (left) with Henry A. Wallace

By Amity Shlaes

This review is from Amity Shlaes’s regular column “The Forgotten Book,” which she pens for “Capital Matters” as a fellow of National Review Institute.

Politicians like to stage economic rescues, which is why President Joe Biden last year kept warning of recession, and why former president Donald Trump tells voters that the economy is running on “fumes.”

But what if the requisite crisis doesn’t emerge, or goes away?

In those cases, sometimes the staff of such powerhouses will try their hand at rigging one.

There’s evidence for such mischief among the New Dealers who served President Franklin Roosevelt at the end of World War II. A look at the archives of the Department of Labor and the Federal Reserve, as well as press reports from the period, suggests that the rigging effort nearly did deepen a downturn. Also interesting is evidence offered by Benn Steil in The World That Wasn’t, a new biography of Henry A. Wallace. At least one underling in the Department of Commerce, where Wallace served as secretary after the 1944 election, drew inspiration for his efforts from a foreign government, that of the Soviet Union.

But more about that later.

This story starts with Americans in 1944, when victory in World War II appeared likely. Millions of soldiers overseas wondered whether they would find a job when they returned home. The Great Depression, after all, had frozen the economy for a full decade before the war. During the war, federal spending amounted to one-third of the economy. When government turned off its mighty spigot, a general slowdown would be inevitable, and in fact the economy did move into recession in 1945. Would the recession deepen?

A feel for the skittish mood among returning vets comes through in William Wyler’s 1946 film The Best Years of Our Lives. “Nobody’s job is safe,” comments a wary manager when a beribboned figure appears at a drugstore to apply for a job, “with all those servicemen crowding in.”

To address the possibility of deeper downturn—but also to play on vets’ concerns—President Roosevelt in January 1944 announced, rather blithely, that it was self-evident the country had already “accepted, so to speak,” an effective second Bill of Rights. Vets would return to an America that would guarantee not only “the right to adequate medical care” but also “the right to a useful and remunerative job.”

This last point amounted to a right to employment, a radical proposition even from the father of the New Deal.

Radicalism

The radicalism can’t surprise. The victorious commander in chief was also a three-term president campaigning for an unprecedented fourth term. Roosevelt’s opponent, Republican Thomas Dewey of New York, himself advocated “full employment.” Dewey’s plan to achieve such employment involved slashing the New Deal’s heavy tax rates.

Roosevelt and his fellow Democrats countered that more planning was the answer. Especially vehement was Henry Wallace, who had been elected vice president in 1940 and now hoped for the second place on the Democratic ticket in Roosevelt’s next term. Wallace allowed that some industrial credits and tax incentives might help the economy, as would a less aggressive labor movement. Wallace argued Democratic leadership could ensure sixty million jobs, or about full employment, in the postwar era.

Roosevelt, as it happened, chose another vice-presidential candidate, Harry Truman. Nonetheless, Wallace, who hoped to become president one day, stumped on late in the election year, spooking the already-spooked by warning that such prosperity could be reached only if government took on “the unpoliced private cartelist,” “the money man of figures,” who sought “abnormal profit” in business.

The trouble with the New Deal was that it hadn’t done enough, Wallace said. New powers for government were needed precisely because not a slowdown but a Depression was likely: “Victory will bring problems on us so thick and fast that we must be prepared.”

After Roosevelt’s death in 1945, Wallace, now commerce secretary, amped up his scare in a new book, Sixty Million Jobs. The “vast and splendid statistical storehouse of the Federal agencies,” Wallace argued, underscored that more planning was imperative unless the country wanted to repeat the Great Depression. The Depression he blamed on “planlessness.”

To make the case that private industry must cooperate in the grand planned venture with ultra-high wages, Wallace produced a report from those he claimed were “able statisticians who analyzed all available data.” Commerce’s data suggested that the auto industry, as a proxy for other industries, could give raises of 25 percent without raising prices or seeing profits drop.

If you wanted to trigger the kind of civil war between trade unions and manufacturers that would prolong a downturn, this report was a good way to do it. Business leaders, who also feared a downturn, were praying that the New Deal would not continue.

The legacy laws from the period were still doing plenty of damage, especially the 1935 Wagner Act, which gave enormous power to unions. Automakers argued that unions might even hurt the prospects for their purported constituent, the American worker. Unions’ insistence that senior workers receive preference in hiring was, as the auto-industry lobbyist George Romney—father of Mitt—put it, “an unbelievable injustice to returning vets,” many of whom lacked factory skills. The vets, Romney said, confronted an effective “lockout.” Romney also demanded to see the data underlying the Department of Commerce’s report.

Romney was right to make his demand. In fact, the great consensus of “able statisticians” the commerce secretary referenced did not exist.

Advisers in Henry Wallace’s orbit maintained connections with Soviet intelligence, the Venona papers revealed.

The Soviet Influence

The report’s premises were chosen largely by Wallace’s primary economic adviser, Harry Magdoff. Magdoff in turn had relied on the work of a single outside economist to assemble them. Magdoff rejected traditional methods of quantifying economic productivity. His report juggled numbers by focusing on labor, rather than all factors in production. Magdoff nursed contempt for those who confined their thinking to “a market system where money is the measure of everything.” Help the worker, help him spend, as John Maynard Keynes taught, and you help the whole economy.

Magdoff was as much Stakhanovite as Keynesian. His ideas were in line with those Soviet economists who emphasized worker productivity above all, as in the case of the storied worker Aleksei Stakhanov, who had made the cover of Time in 1935 for—at least as the Soviets claimed—leading a team that mined more than fourteen times their quota.

Magdoff was also an instigator in the brewing labor war. He told others that a giant postwar conflict between labor and business would “clarify the issues.” In 1946, he would call the idea of a national rail strike a “good thing” and claim that the federal government ought to “seize the mines.” The new president, Harry Truman, angled desperately to prevent a rail strike, which Truman, to his credit, recognized would paralyze the economy. Magdoff scoffed privately that this effort showed Truman was a “dope.”

The Stakhanovite flavor in Magdoff’s work would prove no accident. Elizabeth Bentley, a Soviet mole who turned herself in, told the FBI around the same time that Magdoff, working under code names “Kant” and “Tan,” had knowingly passed documents to the Soviet Union. After the Venona papers, the records of Soviet espionage in the United States, became public in 1995, Bentley’s allegation about Magdoff was confirmed. KGB veteran Alexander Vassiliev reported that “Agent Tan” provided the KGB station in Washington with internal documents relating to atomic power as well. In their definitive history, Venona, John Earl Haynes and Harvey Klehr list Magdoff and others in Wallace’s orbit among those who maintained connections with Soviet intelligence.

Where was Stalin in this story? From Moscow in January 1946, American diplomat George Kennan cabled of “complete Soviet confidence that US is faced with employment problem which it is basically incapable of solving.” Kennan warned further that Professor Eugen Varga, Stalin’s in-house expert on the American economy, was publicly reminding that Stalin had always stood for “creation of [a] united front of workers of advanced countries…to ward off the danger of war,” or, if war came, “to overthrow capitalism.”

At the very least, Soviet leadership probably relished reports, public or secret, of the prospect of serious American economic trouble.

Free Enterprise Leads to Recovery

In The World That Wasn’t (which I review here), Steil concludes that Wallace was in this period “unaware” of Magdoff’s Soviet connection. But what is sure is that Wallace, through his reliance on Magdoff’s report and other efforts, was making the case for the kind of wholescale planning that had so impeded recovery in the decade prior.

Egged on by Wallace and others, lawmakers put forward the Full Employment Bill of 1945, which stated that “it is the policy of the United States to assure the existence at all times of sufficient employment opportunities to enable all Americans…to freely exercise this right.” Over the course of 1946, 4.6 million workers struck—more than 20 percent of the workforce—with strikes enduring for four times as many days as during the war. This slowed recovery from the recession of 1945.

As it happened, the Depression did not return. More-logical policy moves played a big role in the upswing. Truman lifted many price controls, declaring, “There is no virtue of control for control’s sake.” Thanks to a prescient move by lawmakers while the war was still on—passage of the 1944 GI Bill—many of the returning vets were absorbed by our universities rather than joining unemployment rolls all at once.

Though the wage increases labor did win were dramatic enough to cause high inflation, they were not as dramatic as Wallace and Magdoff had hoped. In 1946 Congress watered down the original 1945 Full Employment Act language, dropping both the “Full” in the title of the act and the “right” to employment. In the same year, the electorate signaled its own displeasure at the prospect of a New New Deal by giving Republicans majorities in both houses of Congress for the first time since 1932.

Strikes notwithstanding, the economic skies were brightening in 1946. “Free enterprise has reached the Wallace ‘full employment’ goal four years ahead of time,” columnist Russell Porter trumpeted on the front page of the New York Times business section in July 1946. Given an adequate, non–New Deal economy, the jobs were creating themselves.

Imagine that.

Amity Shlaes chairs the Coolidge Foundation, is the author of Great Society, and is a fellow of National Review Institute. This article first appeared in National Review’s “Capital Matters.”