National Commentary

Budget Cuts Doom The Tepid Recovery


As it comes down to the wire on the “deal” that will rescue America from the brink of a debt default, it is downright scary to think of the grisly historical precedents for this approach.

Specifically, in 1937 as the U.S. was struggling to climb out of the Great Depression, pressures to cut back on New Deal programs and relief efforts in favor of balancing the federal budget plunged the nation back into another deep recession.

In that period, arguably the second most powerful American in government, FDR’s head of the Reconstruction Finance Corporation (RFC), warned against just that outcome, and of course, he proved right.

Jesse Jones was placed in charge of the RFC when Roosevelt came into office into the teeth of the Great Depression and it quickly took on the role of running the New Deal. Jones’ early TARP-like efforts at infusing capital into failing banks didn’t work any better than it has since 2008. As now, the banks soaked it up and didn’t provide necessary credit to industry.

It was only when Jones won the authority to bypass the banks and issue credit directly to worthy industries and businesses, large and small, and to major national infrastructure projects, that things began to improve. They nose-dived when budget balancing took precedence, like will happen now.
Only after World War II started did the RFC, under Jones’ direction, engineer a sustainable recovery through the reconversion of U.S. factories for the war effort, including the development of new synthetics like rubber.

It’s too bad that an authoritative book on this subject, Steven Fenberg’s “Unprecedented Power: Jesse Jones, Capitalism and the Common Good,” won’t be in bookstores (oops, I mean available on line) until September 1. One month of the kind of budget cuts being negotiated in the looming debt crisis shadow now could be enough to doom the national economy.

It probably wouldn’t help, anyway, because Washington is now so locked in the division between Team Hayek and Team Keynes. The radical libertine monetarists of the Austrian School (Von Hayek, Von Mises), thanks to their Tea Party flank, are more certain of themselves than the devotees of John Maynard Keynes, at least if you interpret some Keynesians through Ezra Klein’s most recent Washington Post column, “The Dangers of Misinterpreting Keynes.”

The fact is that the way Jesse Jones ran the RFC, practically speaking, was neither Keynsian or Austrian School.

It was much more akin to that proven, very American tradition of a dirigist “national system,” first articulated by the nation’s first treasury secretary, Alexander Hamilton, in his “Report on Manufactures,” and cultivated through the efforts of John Quincy Adams, Henry Clay, the Whigs and Abraham Lincoln and Lincoln’s key economic adviser Henry Carey.

It was a system that unleashed America’s economic power to rise from an isolated set of colonies to the most industrious nation on the planet by the time of the Great Exposition of 1876 in Philadelphia, celebrating the 100th anniversary of the nation.

The policy, derived from the theories of the German Friedrich List, established that a strong national bank would be the tool for directing resources to the private sector for the specific purpose of building a national rail and canal infrastructure. It was accompanied by a tariff policy that would protect those burgeoning businesses, and the whole idea was embodied in Carey’s notion of a “Harmony of Interests” between business and labor, and business and the government.

It was encouraging when President Obama came into office with his repeated evocations of the legacy of Lincoln. Indeed, using “national system” methods, Lincoln not only prosecuted the Civil War to ensure the preservation of the union, but he oversaw the passage of new laws spurring the next 65 years of unprecedented growth, including the Greenback, Railroad, Land Grant College and Homestead acts.

While the U.S. involvement in World War I appeared marginal, in fact a cataclysm of that magnitude tore the globe asunder in ways not unlike how the Civil War tore the U.S. apart, internally, a half-century before. The U.S. was not immune from the global pressures of the currents leading into the Great War and its aftermath, and the Great Depression ensued.

Nicholas Benton may be emailed at