The Forgotten Man

Just finished Amity Shlaes's The Forgotten Man. A fitting subtitle might have been "What Hoover could screw up, FDR could screw up worse."

The Crash of 1929, says Shlaes, was a natural result of a market that was in a frenzied state of activity operating in largely uncharted waters: there were new markets and commodities (the utilities market, for example) and a turbulent market in a period of unprecedented growth needed to eventually correct itself. The crash became the depression as Hoover got in the way and FDR later went to war against the private sector. Paul Johnson fleshes this out a bit more in History of the American People: the Coolidge administration allowed inflation to rise rapidly without allowing interest rates to rise (shades of Alan Greenspan) or wages to fall, which led to extreme market speculation and an inevitable downturn. Coolidge chose not to intervene when Benjamin Strong, the governor of the NY Federal Reserve bank, chose to give the market "a shot of whiskey" by cutting the interest rate to 3.5%, which allowed inflation and frenzied speculation to balloon to dangerous levels. Both Shlaes and Johnson drive home the point that the growth of the 1920s economy was real, and not the debauched cariacature to which we've grown accustomed. They also both stress that the depression was a natural correction that could have been much shorter than it was. Interestingly, Johnson views the crash as not an affirmation of but rather a rebuke of Keynesian economics: the market crashed, says Johnson, not because of too little regulation, but overregulation by the powers that be; Lazzais faire was not left unchecked, but rather compromised by the sort of tinkering that FDR would become famous for.

Hoover's blunders as Shlaes cites them were primarily that he (1) attacked short-term investors, driving out a presence that was balancing longer term buyers, (2) guilt-tripped business owners into not cutting salaries (subsequently many companies went under or were forced to lay off employees) and (3)the grand poo-bah of them all, that he signed Smoot-Hawley. Of course, after Smoot-Hawley pretty much did in international trade, Hoover decided to impress foreign markets by raising taxes "in order to balance the budget." So in a deflation, when dollars were expensive and scarce, and jobs were evaporating at an alarming rate, Hoover both drove up the cost of living and raised taxes. Brilliant. Hoover took a recession and made the Great Depression.

If FDR had merely continued down this path of folly, perhaps the depression could have ended sooner. Instead, he first embarked on a monetary policy that was indecisive at times(weakening the gold standard, then going off, then waiting a year and going back on) to the point of schizophrenic at others(sending his Secretary of State and top financial advisers to a summit with England and France, ostensibly to undo the damage of Smoot-Hawley and to establish firm exchange rates, then before the summit was over reversing himself three times, and ultimately rejecting the deal that was worked out); in addition FDR continued Hoover's fool's errand of artificially raising prices, and in a number of ways essentially declared war on the private sector.

FDR created a number of new agencies and drafted laws that either regulated or directly competed with private industry. The most eggregious regulatory body was the National Recovery Administration, a bureaucracy of olympian proportions that employed thousands upon thousands of government agents who regulated every aspect of myriad industries right down to how tailors could and could not mend garments; poultry butchers were told how their customers could and could not select chickens; wages were fixed at artificially high levels, unique to each industry. Failure to comply with any and all of the thousands of pages of new regulations could land business owners in prison. Upon hearing the now famous case of the Schecter brothers poultry butchers, SCOTUS struck down the NRA as unconstitutional.

Regrettably, SCOTUS found Roosevelt's Wagner act to be very constitutional. Wagner gave employees the right to form "closed shop" unions--in other words, your employees, once organized, could tell you who could and could not hire IN YOUR OWN BUSINESS. Union leadership was elected for life, they had the right to strike, and the message communicated by FDR contained the implication that, if he was not sympathetic to unions who resorted to violent measures, then surely the employer must bear a healthy share of the blame.

Perhaps the ultimate example of scope creep during FDR's first two terms was the Tennessee Valley Authority. Originally created by Congress to run the Wilson Dam and to improve navigability and flood protection of the Tennessee River, under Roosevelt the TVA was soon competing directly with, and in the end supplanting the private sector.

As if FDR hadn't made his feelings clear about the private sector through his actions, he took the opportunity afforded by several speeches and his fireside chats to personally attack "the wealthy," ie, the people who owned the businesses that could have, under different cicumstances, driven a recovery. As FDR and other members of his administration made clear, the wealthy were reprobate for holding on to their profits in a time of economic insecurity. To drive the point home further, the wealthy were put on trial, literally: Samuel Insull was tried for fraud after his utilities empire went belly up. Andrew Mellon, former Treasury Secretary to three Presidents, was tried for using tax loopholes that his persecutors even admitted were perfectly legal.

As if all of the above weren't enough--regulating, villifying, and prosecuting the hell out of business owners owners--FDR decided to tax the hell out of them as well. The wealthiest investors and business owners in the country could look forward to 75% of their profits being swallowed up on any business venture--while they of course would assume all of the loss if the venture failed. To me most obnoxious of all, FDR's leftist Treasury Secretary Henry Morgenthau decided that businesses weren't producing enough or paying sufficient dividends to suit his tastes, and created the Undistributed Profits Tax to squeeze from industry the cash that he (Morgenthau) thought those businesses ought to have been making or paying out. The reason businesses weren't aggressively producing was because FDR had taken away virtually all incentive for business owners to do business. And yet the administration had found yet another way to punish them. As a result, the economy crashed again. It was a period that Shlaes calls "the depression within the depression."

The consequences of the path that President Roosevelt pursued are depressing to consider. The entire decade of the 1930s was a bleak time all around, with unemployment ranging from highs over 20% to lows that never really went below 14%. The Dow never came close to pre-1929 levels, and wouldn't return there until the 1950s. There were always more than 1 in 10 unemployed, often 2 in 10 or higher. FDR's massive federal spending, often cited as the great salvation that pulled the country out of "Hoover's depression," had little discernable long-term positive impact. As Michael Medved points out, while FDR declared that his "greatest primary task is to put people to work,"

the persistence of devastating unemployment rates should alone identify the New Deal as a wretched, ill-conceived failure. Other measures of recovery show similarly dismal results. After the stock market crash and the beginning of the Great Depression, the Dow Jones Industrial Average hit 250 in 1930 under Hoover (it had been 343 just before the crash). By January, 1940 the market had collapsed to 151 (remaining in the low 100's through most of Roosevelt's terms) and didn't return to its 1929 levels until the 1950's. At the same time, federal spending as a percentage of the Gross Domestic Product soared at an unprecedented rate: from 2.5% in 1929, to 9% in 1936 (long before the wartime spending began). In other words, the portion of the total economy controlled by Washington increased by a staggering 360% in the course of just seven years - without providing discernable benefit to the economy.

If Coolidge sinned in allowing credit regulation to be too lax; if Hoover sinned by being a know-it-all control freak who thought he could force the economy back to health; FDR, at times playfully and at other times vindictively, poisoned the economic engine that under the right circumstances could have pulled the economy out of the depression years sooner than it ended. It is Roosevelt also to whom we are largely indebted for our modern paradigm of class warfare, of the "evil" rich who lie in wait to exploit the "marginalized" or "underprivileged" poor--a paradigm that we see writ large (no pun intended) any time the adjective "Big" is tacked on in front of an industry ("big oil," "big tobacco," etc) Whereas previous administrations and decades had been about ambition, aspiration and growth, the 1930s of FDR taught Americans to expect scarcity, to fear and hate the wealthy, and to depend on government to ride to the rescue.

I wonder how much patience for massive industry bailouts (for "big auto," "big banking," and other too "big" to fail entities), or for stimulus rebate checks for that matter, our country would have if the depression had ended by 1932 or even 1935. Regardless, we do have a lot of patience for the government dole today. Which makes me shudder just a little bit when I hear Barack "spread the wealth around" Obama talking about a $775 billion stimulus package that he himself admits will do little to improve the prospect of trillion dollar deficits for years to come. If we get comfortable with that kind of welfare, America may be unrecognizable in a generation.

UPDATE: New data that unemployment under FDR never got below 20%