Franklin Roosevelt and the Greatest Economic Myth of the Twentieth Century


Textbooks galore point out that President Franklin Roosevelt left a permanent stamp on the American economy. But no textbook in print explains how Roosevelt promoted what is probably the greatest economic myth of the twentieth century: the view that capitalism caused the Great Depression.

During the 1932 campaign against Herbert Hoover, Roosevelt repeated in speech after speech his view that free markets had failed America. During that election year, the U.S. economy was in tatters: 25 percent unemployment, a plummeting stock market, and rampant pessimism sapped American morale. To audiences all over the nation, Roosevelt expounded his theory of why capitalism had failed.

The boom of the 1920s had created a maldistribution of wealth, Roosevelt alleged. The rich were getting richer and the poor poorer. "Corporate profit resulting from this period was enormous," Roosevelt argued, but "very little of it went into increased wages; the worker was forgotten."1

In fact, the poor were getting so poor they could no longer consume enough to support a robust economy, and so naturally it collapsed into depression. The solution, Roosevelt pledged, was New Deal programs for the purpose "of meeting the problem of underconsumption, of adjusting production to consumption, of distributing wealth and products more equitably."2 Economists called Roosevelt’s diagnosis the "underconsumption" thesis.

During the campaign Roosevelt often flayed the capitalists, whose power had "become so disproportionate as to dry up purchasing power within any other group. . . . It is a proper concern of the Government to use wise measures of regulation which will bring this purchasing power back to normal."3 In another speech, he said that "if the process of concentration goes on at the same rate, at the end of another century we shall have all American industry controlled by a dozen corporations, and run by perhaps a hundred men. Put plainly, we are steering a steady course toward economic oligarchy, if we are not there already."4

The underconsumption thesis was not original with Roosevelt, but he acted on it and did more to popularize it than anyone else. But is it valid? Does the evidence support the view that (1) wealth was becoming increasingly concentrated during the 1920s, and (2) that industrial workers were not able to consume adequately because they were receiving a steadily smaller share of corporate earnings during the 1920s?

The economic statistics collected during the 1920s and 1930s give little support to Roosevelt’s ideas. In 1921 the percentage of national income received by the top 5 percent of the population was 25.5. That share remained stable throughout the decade, and by 1929 the top 5 percent received 26.09 percent of the national income.5 Does that microscopic increase really suggest, as Roosevelt charged, that we were "steering a steady course toward economic oligarchy, if we are not there already"?

On the second issue of worker earnings, the evidence directly refutes Roosevelt’s charges. The employee share of corporate income did not decline, but instead steadily increased during the 1920s-from under 70 percent in 1920 to well over 70 percent during the last years of the decade.6

As Peter Temin, an economist at MIT, concluded, "The ratio of consumption to national income was not falling in the 1920s. An underconsumption view of the 1920s, therefore, is untenable." As of 1976, Temin observed, "the concept of underconsumption has been abandoned in modern discussions of macroeconomics."7 In other words, the economic idea that inspired Roosevelt to launch the New Deal was so discredited it was no longer even discussed by economists just one generation after Roosevelt’s death.

Consumption Boost

But the damage was done. To boost consumption, the New Deal had given some kind of government subsidy to farmers, factory workers, veterans, and even silver miners. The era of big government in America was launched.

Why did Roosevelt err? It is tempting to argue that he manipulated data and words to win votes in the short run with an idea that had no resilience in the long run. And, too, many of his Brain Trusters urged him to promote underconsumptionist thinking.

Another possibility is that Roosevelt popularized underconsumptionist ideas because he never understood free markets in particular or economics in general. He came from a wealthy family, and his mother said they never discussed economic ideas at home. When he went off to school he apparently never studied economics seriously or disciplined his mind to study subjects logically. At Groton, the rector, Endicott Peabody, voted for Hoover in 1932, readily conceding that Roosevelt was "not brilliant." At Harvard, Roosevelt was only a C or C-plus student. He showed little interest in his introductory economics course, which he took in his sophomore year.8

Afterward, at Columbia Law School, his professor for a public-utilities course, Jackson E. Reynolds, said, "Franklin Roosevelt was no good as a student. He didn’t appear to have any aptitude for law, and made no effort to overcome that handicap by hard work. . . . He passed both of my courses, but he never received a degree because he flunked. Afterwards in offices downtown he made the same kind of records."9

Once Roosevelt was president, many of those who worked with him were startled by his undisciplined mind and economic ignorance. In a secret diary Brain Truster Raymond Moley wrote in May 1936 after a discussion with the president: "I was impressed as never before by the utter lack of logic of the man, the scantiness of his precise knowledge of things that he was talking about, by the gross inaccuracies in his statements. . . ."10

Moley suggests that both economic ignorance and political calculation shaped Roosevelt’s criticism of free markets. In any case, what we can learn from this historical episode is that bad economic ideas, if not effectively challenged, can sweep an ill-prepared man into the presidency, and permanently change the nation’s economic direction.

Burton Folsom, Jr., is historian in residence at the Center for the American Idea in Houston, Texas, and author of The Myth of the Robber Barons. He is currently working on a history of Franklin Roosevelt and the New Deal.


  1. 1. Samuel I. Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt (New York: Random House, 1938), I, p. 650.
  2. 2. Ibid., pp. 751-52.
  3. 3. Ibid., p. 784.
  4. 4. Ibid., p. 751.
  5. 5. Bureau of Census, Historical Statistics of the United States (Washington, D.C.: U.S. Department of Commerce, 1975), p. 302.
  6. 6. Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: W.W. Norton and Co., 1976), p. 4. See also Thomas B. Silver, Coolidge and the Historians (Durham, N.C.: Carolina Academic Press, 1982), p. 136.
  7. 7. Temin, pp. 4, 32.
  8. 8. Geoffrey C. Ward, Before the Trumpet: Young Franklin Roosevelt, 1882-1905 (New York: Harper & Row, 1985), pp. 180, 207, and Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1954), p. 23.
  9. 9. Jackson E. Reynolds interview, Columbia Oral History Project, p. 42. I would like to thank Gary Dean Best for calling this interview to my attention.
  10. 10. Raymond Moley diary, May 4, 1936, Hoover Institution.


November 2002



Burton Folsom, Jr. is a professor of history at Hillsdale College and author (with his wife, Anita) of FDR Goes to War.

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