The Forgotten Man

Amity Shlaes, “The Forgotten Man: A New History of the Great Depression”, Harper Collins (2007) 383pp. plus 50 pgs of notes and bibliography

This book led to a reevaluation of my opinion of FDR, at least for the years prior to 1941.  Shales convinces me that FDR was a consummate politician mainly concerned with the next election, and then the next. This all-consuming, never-ending, chase for reelection at all levels of the political spectrum that we have so much of today, really began in earnest with FDR.  More importantly, it appears that most of his depression era programs had little practical effect in solving the depression other than the psychological satisfaction that someone cared and was doing something about it.  (Social Security is a great program but really had little impact on alleviating the depression; its effect was only felt later.  On January 31, 1940, the first monthly check was issued in the amount of $22.54. In 1950 a cost of living allowance was added to Social Security.)  FDR’s extraordinary charm as a radio personality did help calm the nation and was probably his greatest political asset.  However, in fact, FDR’s conflicting programs and method of governance introduced so much uncertainty into the American business community, that growth was seriously hampered.  The author documents that both the Hoover and Roosevelt administration’s (but especially the Roosevelt administration) programs were so unpredictable that the resulting uncertainty was near-fatal to the economy. People could not invest until they had some confidence in what would happen next.  Even as late as 1940, unemployment was still in the double digits at 14.6 percent.  It was not about Keynesianism: i.e., whether government spending can cure the economy, it was about what it would take to eliminate uncertainty in the economy.  WWII finally did that.

My Notes:

Pg. 7:  What then caused the Depression?  Part of the trouble was indeed the 1929 crash.  There were monetary and credit challenges at the young Federal Reserve, and certainly at the banks.  Deflation, not inflation, was a big problem, both early on and also later, in the mid-1930s.  The loss of international trade played an enormous role.  If the U.S. had not raised tariffs at the beginning of the decade and Europe had not collapsed in the 1930s, the U.S. would have had a trading partner to help sustain it.  Part of the problem was the challenge of the transition to industrialization from agriculture.  Part was freakish weather: floods and the Dust Bowl.  With money and the weather breaking down, men and women in America felt extraordinarily helpless. 

But the deepest problem was the interventions, the lack of faith in the marketplace.  Government management of the late 1920s and 1930s hurt the economy.  Both Hoover and Roosevelt misstepped in a number of ways.  Hoover ordered wages up when they wanted to go down. He allowed a disastrous tariff, Smoot-Hawley, to become law.  He raised taxes when neither citizens individually nor the economy as a whole could afford the change.  After 1932, New Zealand, Japan, Greece, Romania, Chile, Denmark, Finland, and Sweden began seeing industrial production levels rise—but not the U.S.

Roosevelt’s errors had a different quality but were equally devastating.  He created regulatory, aid, and relief agencies based on the premise that recovery could be achieved only through a large military-style effort.  Some of these were useful such as the Securities and Exchange Commission, enacting banking reform—as well as the reform of the Federal Reserve system and undoing some of the damage of the Smoot-Hawley tariff.  Some gave hope and strengthened the infrastructure, such as the Civilian Conservation Corps which created parks, bridges, and roads we still enjoy today.  However, other new institutions, such as the National Recovery Administration, did damage.  The NRA sought to solve the monetary challenge through price setting.  The rules were so stringent that they perversely hurt businesses.  They frightened away capital, and they discouraged employers from hiring workers. (Later, the Supreme Court found the NRA unconstitutional.)   The creation of the Tennessee Valley Authority snuffed out a growing effort to light up the South.  Because businesses were afraid to invest in this uncertain climate, Roosevelt retaliated by introducing a tax—the undistributed profits tax—to press the money out of them. 

Such forays prevented recovery and took the country into the depression with the Depression of 1937 and 1938.  During this time Roosevelt announced that all we had to fear was “fear itself.”  He also boasted that he would promulgate “bold, persistent experimentation.”  But Roosevelt’s commitment to experimentation itself created fear along with the Wagner act which resulted in strikes in all areas of the country.

The big question about the American depression is not whether WWII ended it.  It is why the Depression lasted until that war.  The period from 1929 to 1940 was dominated by the struggle between the private sector and the public sector for control; the private sector began the era in control, the public sector was dominant when WWII began.  Roosevelt targeted monetary control, utilities, and taxation because they were the three sources of revenue whose control would enlarge the public sector the most.  Since the private sector—even during the Great Depression—was the key to sustained recovery, such bids did enormous damage.  Of course the Hoover and Roosevelt administrations may have had no choice but to pursue the policies that they did to spare the country something worse such as Communism or Fascism.

Pg. 11:  How did Roosevelt get reelected in 1936 given that so much of the New Deal hurt the economy?  The answer is that it is no coincidence that the first peace-time year in American history in which federal spending outpaced the total spending of the states and towns was the election year of 1936.  It can be argued that one year—1936—created the modern entitlement challenge that so bedevils both parties today.  Roosevelt systematized interest-group politics to include labor, senior citizens, farmers, and union workers. 

Pg. 248:  Many of Roosevelt’s programs by 1935 were attempts to preempt the demagogues of the 30s.  The priest, Father Coughlin argued that capitalism should now be “constitutionally voted out of existence.”  Francis Townsend had built a national movement with his own pension blueprint, the Townsend Plan.  Huey Long in the Senate had his evangelizer, Gerald L. K. Smith.  Long’s “Share Our Wealth” program promised senior pensions, free higher education, and employment for all.

Pg. 332:  An interesting point was made at the time to explain why a revolution of the kind then occurring in Spain was improbable in the United States…Spain had no middle class.  But the U.S. still did.  It was probably not a good idea to create the class divisions that Roosevelt’s charges encouraged. 

Pg. 336:  U.S. wages, prices, and the cost of living moved in a fairly consistent way from 1934 to 1936.  But the Wagner Act introduced a dramatic change and was making business more expensive for employers; in the first six months of 1937 alone, wage rose 11 percent.  In the steel industry that rate was 33 percent from October to May.  As the saying at the time went, The Depression wasn’t so bad if you had a job and weren’t on strike.  The data from 1937 showed that August had seen the steepest drop in industrial production ever recorded.  The Dow Jones Industrial Average dropped from its 190 level in August down to 114 in November.  Unemployment was moving back to 1931 levels.  In 1930, the per capita national income of the U.S. had been one-third larger than that of Britain.  By the end of the 1930s, it was about the same.  This lack of growth would later be attributed to “institutional obstructions to a free flow of capital.”