Amity Shlaes, Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations, talks about her new book, The Forgotten Man: A New History of the Great Depression. She and EconTalk host Russ Roberts discuss Herbert Hoover, Franklin Delano Roosevelt, the economics of the New Deal and the class warfare of the 1930s.
About this week's guest:
About ideas and people mentioned in this podcast:Books:
Articles:
Web Pages:
Podcasts and Blogs:
Michael Munger on Middlemen. EconTalk. Garrett Jones on Fisher, Debt, and Deflation. EconTalk. John Nye on the Great Depression, Political Economy, and the Evolution of the State. EconTalk. Robert Higgs on the Great Depression. EconTalk.| Time | Podcast Episode Highlights |
|---|---|
| 0:37 | Intro. [Recording date: prior to June 4, 2007] Russ Roberts: My guest today is Amity Shlaes. Amity is a syndicated columnist for Bloomberg and a visiting senior fellow at the Council on Foreign Relations. Her latest book is The Forgotten Man: A New History of The Great Depression. Amity, welcome to EconTalk. Amity Shlaes: Oh, thanks for having me. |
| 00:53 | Russ Roberts: Amity, a standard view of the Great Depression is that Herbert Hoover was some kind of laissez-faire, a Milton Friedman acolyte who stood idly by as the economy plunged into depression. And then, Franklin Delano Roosevelt came along and, inspired by Keynes, he spent our way out of it by putting purchasing power into the hands of consumers. You take issue with both of those claims, the hands-off part of Hoover and the neat story of FDR. Let's start with your take on Hoover. What was his philosophy? Amity Shlaes: Well, I look at Hoover first, not for what his philosophy was, but for what his temperament was. He had free market elements to his philosophy. He came out of the world of markets. He was enormously successful. He was like a Bill Gates of his day because he had the luck and the talent in the area that was growing the fastest, mining, at that time. If you were a gold miner in those days, an engineering miner, you were like the best kind of chip inventor today. You were in that area of economy that was the sweetest. So, he was a private sector man who understood the power of the private sector, but his temperament trumped his philosophy and his temperament was he was a control freak. So, he wanted to control things. He was a consultant. That's how he worked. He came in, fixed things as if he worked for McKinsey, and then stepped out. And, when the crash happened, he tried to control it and did a lot of wrong things. One of the ones that I was surprised to discover, Russ, when I went through it was he called business together and said, 'Don't lay off people,' which we think of as a Keynesian thing to do. What he was saying is keep people employed so they have money so they can buy things so the economy can come back. But, that's very hard on the business side of it because the first thing you want to do when you're in a recession is cut costs. And, rather than lay off people, the other choice is to shut down. And, indeed, that did happen because of Hoover's action there. And, he used a lot of moral suasion, the bully pulpit. He said, 'A good man will not lay off people.' That's a very strong thing to say in a country. And, the second very bad thing he did was not take seriously the importance of international trade and free trade and sign off on a bad tariff, the Smoot-Hawley Tariff Act, even though economists from all over the country wrote him letters saying, 'You will hurt our economy if you sign this.' His party was more or less for tariffs. It was in their platform. He knew better, but again, the control freak and prevailed and he said, 'I'll sign the tariff if you give the executive certain special powers and create committees.' And, he signed the Smoot-Hawley Tariff, and that helped make the crash into a depression. |
| 3:49 | Russ Roberts: You talk about his temperament. I'd like you to give us a little more background on it because I found that extremely interesting. Most people today I think have very little knowledge of Hoover, other than that he was the president during the crash of 1929 and that he was unceremoniously kicked out of office by the voters, and leading to Roosevelt. But, he was an extraordinarily accomplished man, as you point out, in a variety of areas, one of which was the private sector, in mining. But, he was also the leader of a number of top-down government-led, or at least centralized would be a better way to say it, projects. The relief of famine in Europe in, when was that? In the 20s? Amity Shlaes: Well, first of all, during World War I. Russ Roberts: In the late part of the teens, then. Amity Shlaes: Yes. Hoover was a man, if you met him at a dinner party, he'd seemed familiar to. He was enormously successful. He was usually the smartest person in the room and he made the fallacious assumption that he was always the smartest person in the room because he had so often been the smartest person in the room. And, his idea of how to fix things was to take charge. And, even though he might sometimes know that taking charge was disturbing, he gave himself an excuse which came out of his moral views and a little bit out of his faith. He had a Quaker background. I wouldn't say he was a very, very religious Quaker, but he had a Quaker background. And, he said, 'I am doing good with my great intelligence and therefore that which I do is good.' And, he led a relief effort, very famous in Belgium. If you go to the Hoover Institution in California, you can see the flower bags that were embroidered by the Belgian ladies to say thank you to the Hoovers. And, the food that they provided did help the Belgians and keep them from starving. Russ Roberts: And, was in charge-- Amity Shlaes: But, there was also an argument against that because he was doing it during the war, and food is fungible, and this allowed the Germans who were occupying Belgium not to feed the Belgians. So, it was controversial. The English didn't exactly like Hoover butting in and leading an international red cross style effort in Belgium. And, he also did a similar thing with a great flood. They had a flood like our flood, our recent flood, theirs was in 1927. It was giant, and he led the rescue of the South, and he undoubtedly changed lives. But, Coolidge, the president, and this foreshadows our own debate, wasn't totally comfortable with the federal government marching into the South and rescuing it from the flood because he believed that was the state's job. Russ Roberts: But the irony is that, as you point out, he was a fixer, a doer, an engineer, a problem solver, someone who felt that for problems to be solved, the solutions had to be designed rather than having them emerge from the actions of individuals. And, yet his historical reputation is as a hands-off guy. Now, one of the examples you mentioned was his use of the Presidency as a bully pulpit to keep businesses from laying people off and from cutting wages, if I remember correctly from your book. But, at the same time, he did more than that. He was active in trying to produce some government spending and other things that he was hoping would cure this downturn. Amity Shlaes: Yes, Hoover was something of a constitutionalist. So, he followed the rules, unlike Roosevelt, to whom we'll get later. But, Hoover did believe that spending would help. That's a Keynesian style belief, though you don't see a lot of him talking about Keynes. He reached out to the states and all the states wrote him and said, 'Yes, we will spend money on projects.' And, one of the governors who wrote him was FDR [Franklin Delano Roosevelt] from New York, a very important state, the California of its day electorally, and said, 'We will do good spending too in order to bring the economy back.' So, he was for spending. Hoover has been, I think he deserved all he got because he should have known better, but he just couldn't help himself is my bottom line in the book. He should have known better, but he couldn't help himself. But, he was very much punished for the things he did by history. Don't you agree, Russ? One of the things he did that he did very beautifully was the Hoover Dam in which he arranged a compact among states, again, following the constitutional line, to build the Hoover Dam. Because many states are involved in the Hoover Dam in that area, and it was named after him, and he was very proud of it, and it was going up. And, when the Roosevelt administration came along, they took away the name because they didn't like the idea of any great project being named after Hoover. So, they trashed him, the Roosevelt administration trashed him and history trashed him. Russ Roberts: Yeah, but you paint a richer portrait of the man, which I think is interesting. Amity Shlaes: All the way through the 1930s, he kept saying, 'I am a big spender.' The way that his reputation was bad and the way that he thought he could fix it was telling people he really was like Roosevelt, which was wrong. In fact, he should have gone the other way. Well, actually he did both because he tried all that because he was desperate. But, he kept apologizing. He wrote a number of apologetic books, and they were all basically about how he had acted and acted and acted when inaction might've been the better course in many of the areas. |
| 9:51 | Russ Roberts: Well, speaking of action, let's turn to Roosevelt. Again, I think the stereotypical view, the cliched view that some people have of Roosevelt in the 30s was that by his taking hold of the tiller of the economy, as if there were such a thing, I find the imagery rather unattractive intellectually, but the idea would be that the ship of the economy was floundering and we needed a strong hand at the tiller. Hoover didn't want to put his hand on the tiller. Roosevelt did. He steadied the economy and put it back into healthy waters. You paint a much more complex picture of Roosevelt's actions, and if anything, he comes across as a relentless tinkerer with the economy who tried this and that and the other thing in desperate hopes that something would work, and certainly in the political hope that he would get credit for being active. Talk about that. Amity Shlaes: Yeah. Well, a helmsman has a course. He knows where he wants the ship to go, or the craft, and I'm not sure Roosevelt really did have a course. But, historically, when we learned in school about what happened, we learn that Roosevelt came along and spent a lot and that helped the economy and he spent here and there where it was needed. So, he targeted spending, and that was especially useful and wonderful, and we can all learn from that and should do that nowadays. I'm oversimplifying. But, what that explanation, and that comes out of the phrase, he said, 'We will do bold, persistent experimentation.' And, we were taught that. That was a wonderful phrase. But, what that attitude neglects is an appreciation of the cost of uncertainty. When the ruler, which is what he was, a ruler really, because he had Congress with him, doesn't let you know what he's going to do next and is unpredictable, you freeze. And, in the histories that I read of the Great Depression, this aspect was generally left out. The economy froze and decided to wait. Capital did go on strike because Roosevelt was so creepily unpredictable that they were terrified. And, that cost the economy quite a bit. Russ Roberts: By they, you mean investors, business executives? Amity Shlaes: Investors. You look at private investment data, you look at employers. They were terrified that along with new rule that would change the old rule. And, it's not only that the Roosevelt Administration's projects were bad, some were good, many were bad. But also, that he kept changing course and not heading in any special direction. One of his favorite advisors, a man whom I came to love in writing this book, was called Ray Moley. And, Ray Moley was an expert in prisons and criminal law and reform, and he was sort of like a Tocqueville, very wise. And, Moley said, 'If you looked at Roosevelt's policies, you looked over them. And, to say that they had any general purpose, to say that there was any single informing plan behind them was as silly as to look at a boy's bedroom and see the snakeskin and the old mitt and tell yourself that an interior decorator had decorated that room. When we all know that a boy's room is random.' Roosevelt was random. And, that worked politically because he was an exciting figure. And, we'll talk also about other things he did that made him so successful politically later, but he was random. And, I tried in the book to capture the incredible terrifying sense of his randomness and why business went into hiding. By the way, Russ, as you know, he did some very destructive things once business did try to hide, such as create an undistributed profits tax to eat away the essence of business, that's like a wealth tax. |
| 14:05 | Russ Roberts: Let's talk about that. The claim was that the money needed to be put 'back into the economy'. So, the idea was that if companies kept their profits, somehow that was stunting growth. And, this was to force them to turn the money over to the government who would spend it. Is that an accurate-- Amity Shlaes: That is correct, but it also takes away their ability to invest. Russ Roberts: Well, and discourages the incentive to invest, too. Amity Shlaes: It discourages the incentive to invest. Maybe they wanted to invest in long-term things. And of course, when Roosevelt did that he would alternately be pro-business, work with business in an almost Italian way. Like let's all work together, and then he would be anti-big business and pro-small business. He was living at a time with Justice Brandeis in the court, and Louis Brandeis wrote a book called The Curse of Bigness, and he didn't like laws that were about bigness. He rejected one of Roosevelt's most important laws, the National Recovery Administration, the centerpiece of the New Deal, because it was too big and top-down and centralizing. So, Roosevelt would go back and forth depending on what he felt Brandeis and the others would approve and depending on what seemed popular. And, he would be alternately cozying up to big business and smashing it and trashing it with his own justice department. |
| 15:26 | Russ Roberts: Yeah. Your description of the National Recovery Administration, the NRA, let's talk about that because the scope of it was not well known to me, and I think it's probably not known to many of our listeners. And, this tension at the same time between embracing bigness and worrying about bigness, and this is a tension that's in our economic philosophy today, this idea that somehow big is good because it's efficient, but big is bad because it's big and dangerous and powerful. And, that tension, Roosevelt bounced around back and forth between those two views. The National Recovery Administration, the NRA, was going to do a lot of damage to small business, correct? And, make it easier for large businesses to grow, despite the philosophical antagonism many people in the administration had towards big business. Amity Shlaes: Exactly. The NRA was a conflicting law. There were a lot of conflicting elements in it, but basically it said, 'If we--' it had a romance with the economy of scale. It said the reason our economy isn't growing and we're into depression is we're not efficient. So, if we can be big and efficient and save, we will be just better. And, if we can keep prices up, we will be better and stop deflation, which is a total fallacy. And, if businesses can get along, it was sort of cooperative like you hear now post-war Germany where labor sits in the boardroom and works with corporate management and government. If you want to have an image for it, you imagine a bunch of men from different groups, labor, the company, the government meeting in a room and setting the growth rate. It was very much inspired by the Soviet Union. One of the things I get into in the book is that the extent to which the Soviet Union inspired the NRA, the people who ran the New Deal were, as far as I could tell, by and large, not traitors. They did not work for the Russian government. And, they were not mostly in the Communist Party. They were simply New Republic authors. But, they were influenced by the Soviet Union. They thought it was exciting and good, and they ought to try it in the United States, and the NRA was the biggest embodiment of that. So, I think the best way to do it, but the result was perverse because there were too many rules, and it was in every area of economy, Russ, from sewing to tailoring to chicken slaughter, what I get into in the book. Every area of the economy was addressed by codes and rules with false premises. And, there's a poem by Ogden Nash that I'll read aloud, at least part of it, that captures it. He wrote, Mumbledy pumbledy, my red cow, Russ Roberts: Yeah, oops. It's a wonderful bit of doggerel from Mr. Nash. Amity Shlaes: It's wonderful and he says: Abracadabra, thus we learn Wonderful poem. So, that was what happened. There were so many rules. People went crazy. And-- Russ Roberts: And, people were put in jail for-- Amity Shlaes: People were put in jail. There were criminal teeth to these things. And, I focus in the book on one family. They were called the Schechters. They lived in Brooklyn. They were kosher butchers. And, when I went to look at it, I knew this was a famous case, Schechter Poultry, v. NRA, Schechter Poultry v. the US. They were charged with breaking the NRA rules and maybe they had to go to prison. There were many, many charges against them. And, they were convicted in the first instance and they fought back. They barely spoke English. Their lawyer went to Brooklyn College and he was up against Harvard lawyers from the Justice Department. Russ Roberts: And, they were just a small family business. The thing I found most striking about that part of the book and that story, which is so remarkable, is it's a family business. It's run in some modernish sense that there were books, there were accounts. But, they were picked out to be an example--I could say plucked. They were plucked to be an example of how business, especially small business, had to get in line and conform with these regulations that were going to basically cover every single bit of the economy. Amity Shlaes: That's right. And, their emblem was the chicken and the government's emblem was eagle, the emblem of the NRA was a blue eagle. It was a wartime culture, so it was "The Chicken v. the Eagle"--that's what the chapter's called. And, they fought back. And, what I did was I went back and looked at their testimony, which I hadn't read anywhere else. And, when you look at their testimony, you see they were making the same economic arguments that Professor Russ or Professor Boudreaux, his colleague, or Professor Friedman Milton the late or Professor Samuelson, make in classrooms, just in their poor immigrant language. For example, the lawyer from the government, Walter Lyman Rice, was quite hostile to them when they were on the stand about the fact they were charging low prices and saying, 'You don't understand. You're a bad economist. You're lowering your prices, you're hurting the economy,' was the gist of what he was saying. And, they'd say, 'I charge low prices like anybody else. That's the market.' Or the lawyers would berate the little Schechters, and they were small, and say, 'You're not very educated, are you? You're not an agricultural economist.' And, the Schechters, who were immigrants, would say, 'Oh, no, I don't have college. I don't have--' the quote was, 'I don't have school,' one of their friends said, 'not much school.' And, the lawyer kept saying, 'But, you're not an economist. You don't know what you're talking about.' And, finally, one of the men, not a Schechter, but someone else in the case drew himself together and said, 'I'm not an economist, but I am an economizer. I know that is the law of markets, and I know I have to charge low prices even though the NRA says no, because I won't survive in the chicken market in Brooklyn during the depression. With high unemployment, it's very, very competitive.' |
| 22:06 | Russ Roberts: The other part that I think listeners would enjoy is this argument about the role of the middleman and straight killing. The Schechters were middlemen. They didn't have their own chickens. They bought chickens and then sold them to retailers. They slaughtered the living chickens and then processed them and then sold them to retailers. And, part of the NRA was to rule out what was called straight killing, or to allow, I forget the terminology, but the idea was is that consumers could not, in this case, the retailers could not pick out their own chickens from a batch. They just had to take the first ones that came to hand. And, I mean, it's such a horrible grotesque argument, but really for me, it really highlighted this bizarre for philosophy that underlay this NRA and the bad economics of this period, which was somehow you had to make it more efficient. And, if you let customers pick out their own chickens, that would be inefficient. It'd be better for it to be quicker. And, so-- Amity Shlaes: Right. There are two things going on here. One is this fundamental breach of what we all know, which is the value of consumer choice in an economy to send signals. It's not only good for the individual consumer to get the chicken that he wants. And, this was a period when there was still tuberculosis and no antibiotics and what animal you ate could kill you if you ate the wrong animal, right? So, consumer choice is very, very important, the housewife, 'I want that chicken, the healthy looking chicken,' but also for the rest of the economy because it sends a signal, right? Russ Roberts: Right, punishes firms that produce lots of bad chickens. The thing that's-- Amity Shlaes: The second thing, I just want to get to the middleman thing. Russ Roberts: Yeah, go ahead. Amity Shlaes: So, there was this rule that made no sense, you can't pick your own chicken. Chicken business is a haggle business, especially in the ethnic world, the religious world of kosher food. It's a haggle business and haggling and picking we're not allowed. But, the second thing is this concept that the middleman gets in the way or is somehow not a good person. Russ Roberts: It's a parasite-- Amity Shlaes: It's and age old concept. I'd say it's anti-Semitic because Jews in Europe were often playing the middleman role. They were trading, buying and selling rather than producing. And, it's a fallacy to believe that middlemen don't help the economy because actually they render the economy more efficient. And, the New Deal fell into that old medieval fallacy by subscribing to it. Russ Roberts: Sure, because, just taking this idea of picking your own chicken, if you're a provider of chickens and most of your chickens are crummy, people aren't going to want to use them. And, if somehow you always provide lousy ones, the marketplace is going to weed that firm out. It's going to make it harder for that firm to survive. The consumers aren't going to want that. But, if you don't let people choose and you just stick them with whatever they have, that whole mechanism is put--it doesn't work as well. Amity Shlaes: And, what struck me, Russ, was the arrogance. The lawyers in the Schechter case were arrogant, arrogant men. There was an ethnicity issue that I had never thought of before. I looked at this. They were Anglos, they were from Washington and Harvard, and they were attacking the chicken people as ethnic and corrupt. So, it was like Al Capone a bit, the untouchables from the capitol, calm, the clean people, and they attack the little bad ethnic people. Russ Roberts: And, it is a dirty business, chickens, so it's-- Amity Shlaes: Chickens is a dirty business, so it's easy to caricature. And, it has through history been caricatured. So, all this was going on and the chicken people happened to be right, and they wrote poetry about their case. And, what's wonderful, and this is a story that I hadn't really known before, was they won. Russ Roberts: Yeah, no, it's a great story. Amity Shlaes: The Supreme Court found for them. And, the Supreme Court is portrayed in the classic histories as bigoted and creepy, and they were bigoted. This is the court that had decided on the Scottsboro Boys, who, wrongly I guess, or at least with wrong outcome for the boys, and were regarded as, at least in retrospect, as racist and bad. And, yet if you want to look it through a race and cultural lens, which we can for a minute, they sided with the little ethnic people in the chicken case in Schechter Poultry and against the big government. They had, of course, jurisprudential reasons for doing that. The issue of delegation, the issue of commerce, the Commerce Clause, those were the real legal reasons why this happened. But, there was an ethnic element, which I found quite compelling. And, what we've forgotten is how nasty the writing was at the time, and the columnist, Drew Pearson, mocked the Schechters at length in his articles, calling their lawyer was a little hook-nose person, writing things that we wouldn't write today. And, that was just all part of the story and in the name of a wrong, bad law, Russ Roberts: And, because the Schechters won that case and avoided jail for, again, it's a remarkable thing, they were going to go to--I think you said there were 60 counts of wrong doing on their part, but some of those counts were simply the idea that they had charged too little, which is just a remarkable thing. Because they avoided those counts because the Supreme Court sided with them, they did not go to jail, and the scope of the NRA had to be reduced. Correct? Amity Shlaes: The NRA had to go away. The whole thing collapsed. The bone of it, we're sticking to the butcher metaphor here. Russ Roberts: Yeah, here. Amity Shlaes: The bone and sinew of it, one of the justices said, just couldn't hold up. And, I also looked at the stock market throughout the book, and I note in the book that the stock market, the Dow began to rally around the time that the Schechters won. The high water mark of the New Deal was over, the Schechters won, the NRA became illegal, and the Dow recovery tracks that, which was interesting to me. I've never studied that before, |
| 28:36 | Russ Roberts: And, we talk a lot about how presidents 'run the economy'. They don't. It's a silly metaphor, again, this sort of helmsman or steering of the car, the economy or the train or whatever metaphor you want, I think all those metaphors are misguided and the president doesn't do anything close to running the economy. But, in those days, we were getting closer to that. The NRA really was an attempt to micromanage the economy, I think with very bad economic principles. But, the level of control was quite extraordinary, and that really was, as you say, the high-water mark of that viewpoint, and mercifully it receded after that. Amity Shlaes: And, the markets told us the story. There's one meter of Roosevelt's success, that's his fantastic success in the political polls. There's another meter that's the unemployment level, which was two in 10 frequently through this period. Russ Roberts: Two in 10, 20%, Amity Shlaes: 20%. And, I argue that the Dow is an important meter too, and it didn't come back, as you know, Russ, until the 1950s. I argue in this book, it just wasn't merely monetary issues that affected that. Monetary was important, but so was Washington policy. I just wanted to read another little tiny poem from Mrs. Schechter. Russ Roberts: Yeah, I like that poem. Go ahead. Amity Shlaes: Because the human angle to the great story is always there. She was so happy when her husband won and they were exonerated and she wrote a poem. And, I actually got permission to use this poem from the family: No more excuses to hide our disgrace Russ Roberts: Where'd you find that poem? Amity Shlaes: I found that poem in the newspaper, but I actually went and got permission from Glenn Avner, who is a descendant of the family, and he reached out to, I think one of the daughters, because I didn't want to reprint it without their permission. The Schechter's looked a little bit at my telling of their story, Glenn did, to see if it felt accurate, which I thought was important because there hasn't been much written about before. There's a book called Gideon's Trumpet: it's very, very important to American liberals and to many of us about Miranda. Russ Roberts: Anthony Lewis, right? Amity Shlaes: Yes, Anthony Lewis. It's about having your rights read to you when you are arrested. And, that book just means a lot to generations and generations of people. That was the lawsuit, the Gideon case. Well, this is a Gideon case, the Schechter case. It is our lawsuit. It is the lawsuit that stopped the NRA. It stopped big government. It set back the New Deal. The New Deal never recovered, and I believe it's very, very important to us. Russ Roberts: Well, it stopped big government at a certain dimension. Any worry that we were heading towards some form of national socialism or on the right or five-year Soviet-style plans on the left, it took the hand off that tiller to a large extent. Of course, it was not literally the end of big government, at least measured in terms of spending or regulation-- Amity Shlaes: Absolutely not, no. Russ Roberts: but it did mark the death knell of that level of control, which is all to the good. Amity Shlaes: There were components of the NRA that were passed as new laws such as the Wagner Act had the labor component, and there was hours act about hours and standards later in the New Deal. Russ Roberts: Fair Labor Standards Act, yeah, minimum wage was passed. Amity Shlaes: So, we lost a lot of the ground gained in Schechter. Still, I think in terms of common sense, it was a recognition that I want to mark. Anyway. |
| 32:35 | Russ Roberts: Yeah, no, I agree. The other thing I think that it illustrates again for listeners who don't have a historical perspective, is the remarkably low level of economic reasoning that was in the debates of the day. Sometimes it's easy to get depressed about the level of economic understanding in America, and it's even easier to get depressed about the level of economic understanding that politicians at least speak about. But, one thing that comes through in the book is how depressingly bad the level of economic understanding was at the time. And, it cuts across so many dimensions. The most famous one, of course, is the role of money and the money supply that Friedman and his co-author-- Amity Shlaes: Anna Schwartz. Russ Roberts: Anna Schwartz talked about in the Monetary History of the United States. And, we have a nice podcast with Milton about that work and its impact on the world. But, one of the things we have to think about when you're thinking about those times is how little understood the Federal Reserve was. It was relatively new. I think it was created what, 1913. It's relatively new. Its role was not well understood, not just by the average person, not just by investors, but by the people in charge of the Board of the Federal Reserve itself. And so, that is one level of economic ignorance. That's what you'd call the macro level macroeconomics. Then you have this extraordinary weird understanding of microeconomics, the idea that you can make the economy better by say, killing pigs, driving up the price of pig and pork, and thereby making people richer. Well, it made farmers richer and it made consumers poorer. It's a horrible idea to create wealth by destroying stuff. And, yet that was not understood, or at least it wasn't understood well enough to stop it from happening. Amity Shlaes: It wasn't understood well enough to stop it from happening and it was the big precedent that we live with today. When you see ag subsidy in the billions today, it in the 20s, but it was institutionalized to the most serious extent for America in the 1930s. And, they did kill pigs. They killed 6 million pigs before they grew up in order to drive up pork price at a time when people were starving. And, the outcry was at the time very loud. I would differ with you a little. I believe the understanding of people in government about economics was poor, and the rules in government were poor, but there was a lot of native understanding among the people that was usually good. Certainly on the micro side. Maybe not on monetary. Monetary is hard. Russ Roberts: Yeah, it's a lot, obviously. Amity Shlaes: Monetary is hard for everyone. Monetary is like physics, really only 10% of the population can do it, and the rest of us just pretend. Hello. Excuse me there, Russ. Russ Roberts: That's okay. I'm still here. Amity Shlaes: Did you want me to speak a bit about the monetary? Russ Roberts: No, not particularly. I like your point about the economic ignorance being maybe not as widespread, at least among the general public. But, I felt like, in reading the book, that the level of debate about certain economic reforms or certain economic ideas, that today a lot of those ideas would have trouble surviving because they're so absurd. I think there's a better understanding. There's certainly a better understanding of monetary policy by economists. I think there's even a better understanding of how markets work by the general public that would stop some of those absurd ideas from being a policy, but maybe not. Amity Shlaes: Well, I think so. But, although you wonder nowadays about protectionism. Russ Roberts: Yeah, yeah. It's always [inaudible 00:36:31]. Amity Shlaes: You wonder. There was an economist at the time who understood that it was a monetary problem, that there wasn't enough money literally. And, that was Irving Fisher. Russ Roberts: Yeah. Who is the father of modern monetarism and extraordinarily important figure in the history of economic thought. Amity Shlaes: He made indices as well. Russ Roberts: Price indexes, yeah. Amity Shlaes: He knew that, if you want to put it in kindergarten language, which is the level that most of us operate at anyway, there wasn't enough money. And, because of their affection for the gold standard, and they had a mismanaged gold standard, by the way, they didn't want to make more money and they didn't really know how to, and they didn't have the right fed law yet because the modern fed law was passed in the 30s. So, around the time of the crash, they didn't have the system set up right. They just didn't know how to handle it. So, even had they wanted to, it would have been harder. They just weren't really aware of how to do open market operations to buy and sell bonds to make or extinguish money. So, Fisher saw all this. He was a professor at Yale, but he was also a bull. And, he was someone who was a very big 1920s bull. And, when the-- Russ Roberts: By 'bull' you mean an optimist about the future? Amity Shlaes: An optimist. He believed the stock market should go up and up. And, when the market crashed, he became the emblem of wrong judgment. So, people said, 'Irving Fisher, what a joke.' He said the market could go higher, and he did indeed lose money that he invested. So, he became a ridiculous figure. But, the truth is he was right, there wasn't enough money. And, in the book I talk about how he tried to talk to all the presidents. He went to see Hoover, he went to see Roosevelt, he went to see Willkie when he thought Wendell Willkie would become president and tell them his story about how there wasn't enough money and there was deflation and there needed to be more money. And, he was basically a prophet who was mostly right about this. And, again, character played a role too here. He was kind of an up and down person, I don't want to speculate, but maybe manic, a little bit crazy, but crazy with genius. And, he seemed like a nut, but he wasn't a nut. He was mostly right-- Russ Roberts: Yeah, he was a really smart guy. Amity Shlaes: on this issue. So, I tried to capture some of that. And, he wrote to his wife and his son wrote about those letters trying to see the presidents. And, he was at first very pleased with Roosevelt because he thought Roosevelt understood there needed to be more money and would try to create it. And, Roosevelt did, in a very primitive way, try to create more money. But, the way that he did it, rightly disappointed Fisher because Roosevelt did it by pouring effectively thimble fulls of water into the ocean in the hope of making the level go up. He didn't do it a very efficient way and he gave up fast. |
| 39:31 | Russ Roberts: And, the problem of deflation, and as you say, it's a complex topic, but I think the easiest way to understand it for our listeners is that if prices are falling or rising, that's not so important. What's important is whether people expect them to rise or fall and have taken that rise and fall into account in how they write their contracts, especially with respect to borrowing and lending. And, if you haven't done that, if you didn't expect prices to rise or you didn't expect prices to fall, contracts over time then become very painful. Because a house that you bought that you thought was going to be worth enough money, you could borrow against it or use it as a form of collateral, suddenly becomes difficult because fulfilling that promise to pay off that mortgage becomes difficult because wages are falling because prices are falling. Amity Shlaes: Yeah, it's always bad to be a borrower in a deflation. Russ Roberts: And, it's bad to be a lender at a time of inflation, but in a world where there's debt and prices are falling, it's a very alien world to us in 2007. We have no experience of it. But, in the old days before the Fed was active, that problem had to work itself out fairly painfully, and in this case, it worked itself out very tragically for people who owned homes that they had borrowed against, farmers and others, and that did have a very destructive-- Amity Shlaes: They lost their homes. Russ Roberts: Yeah, a very destructive effect. Amity Shlaes: Sometimes as many as three and 10 or four in 10 in some towns. Actually Ben Bernanke, the Fed Chairman, has written about this himself. What I was going to say is it also helps us to understand our grandparents' personalities. Deflation punished risk-takers, people who were leveraged. If you were leveraged, you looked like a complete fool and you lost everything. If you were parsimonious in a deflation and maybe even a lender, you were rewarded and quite well because so many other people were unemployed. You could hire them cheaply. So, that was the character that was a good character when our grandparents were growing up being adults or our parents or our great-grandparents. And, when we see our grandparents today or our parents or our great-grandparents, depending who we are, saving rubber bands or buying savings bonds with low rates of interest, that all comes out of the Depression. |
| 41:59 | Russ Roberts: Yeah, no, it's a very interesting cultural side to the Depression. Let's turn to that for a minute. My parents were born in 1930 and 1932 respectively, and they were definitely affected by that experience growing up in that world. It did make them much more conservative economically, financially. It made them much less eager to take risk. It made them much more careful with their spending than I think I am or my children will be because of that very traumatic experience. But, you tell some wonderful examples in the book of the cultural impact of the Depression and try to give us a richer picture, I think, than the one that most of us have. Talk about that. Amity Shlaes: Well, we tend to think of that period as a period where government became important in our lives, but I also looked at some people who demonstrate that that period was the period of turning inward and becoming strong without government. One of the big heroes of the period for me is Bill W., the founder of Alcoholics Anonymous, AA. He was actually a Wall Street person. He drank his way around Wall Street. I'm in Brooklyn now. He lay on the cobblestone streets of my neighborhood, drunk as a Wall Street, sort of a proto-stock analyst. He was a miserable figure, didn't know where he was going, lost his money and so on. And then, as people know, he created the modern self-help group to address his problem, in that instance, alcoholism. The meeting where there's no clergymen leading it, because historically clergymen help situations, right? People go to the priest or the rabbi or the minister. He created this new thing which was quasi-religious, but it was citizens helping one another in a community, a network of people, the AA group. And, he did it well aware that it had nothing to do with government. Indeed, his wife reports that he wrote letters to Roosevelt complaining about Roosevelt's policy. So, he was a little bit against the big government thing, and he believed it comes from within, getting through such periods, and his AA is a model for us. So, in a way, there's a triumph over the new deal because his AA, to us, those two letters, that acronym still mean a lot to us. All kinds of self-help groups from drug to whatever, codependence, are named after and modeled after his AA. Whereas the alphabet agencies of the New Deal are foreign names to us now. The NRA, you and I had to explain what it is. That's the legacy from the period that's worth remembering, the self-help component. Russ Roberts: Yeah, that's a nice example. Let's turn to the politics, or the political economy. One of the things that's chilling about the book for me is the way that Roosevelt and his aides use class warfare. It wasn't the first time in American history, obviously the late part of the 19th century, and probably goes back to the founding, the rich are often vilified when it's politically convenient. But, it again plays into a, for me, what's a depressing example of economic ignorance, which is this idea that somehow if the rich have a lot of money, they've stolen it from somebody, and therefore justice requires that they be punished. This view that the world is a zero-sum game, that everything that is gained by the Bill Gates or Warren Buffet or in that era, the Mellons or the other successful folks must have come at the expense of someone, and therefore it's just to take them down. And, you give a lot of interesting and chilling examples of how that rhetoric was used very parallel to the post Sarbanes-Oxley experience where somehow business has failed and has to be fixed and regulated, regardless of whether the fixing is going to make it better, but somehow something has to be done to successful people in. It's a total misunderstanding of how wealth is created. That it is created. It doesn't just moved around. What do you think of that-- Amity Shlaes: I'd like to say two things. The first is that Sarbanes-Oxley language is mild compared to what they used then. And, the reason that is so, and indeed the reason I could write this book is we learned, you and I, Russ, in our experience, in our age, learned that markets are generally good. In the 1970s, 1980s, and 1990s--well, not so much as 1970s, sort of, the 1980s and 1990s, we've learned that the private sector is really important. And, we've seen the Soviet Union and the planned model fall away. So, we know this, and then we're able to go back to that period and see how very wrong they were and see it as an exception rather than the rule. That's a big change. The rhetoric then was horrible. Roosevelt said he knew that people hated him, the people he attacked, and he said on the air, 'And, I welcome their hatred.' He outright declared war against the sector of the economy that could have given the growth that would have ended the Depression sooner. And, he had a new tool to wage that war with, which was the tax code, because the income tax, like the Fed of which we earlier spoke, was young. But, it did exist and it mostly applied to rich people. All applied to rich people. Low earners did not pay the income tax at that time. The average earner did not. And so, they raised the income taxes way up from where Andrew Mellon had had them in the 20s, into the 70s, I believe there, I'm not quite sure. I have to look up my chart, but-- Russ Roberts: I think that's right. Amity Shlaes: yeah, into the 70s. And, that again, prevented people from creating jobs. And, he also prosecuted people, and he did so in an egregious inexcusable way, by taking avoidance, which is sometimes legal, and evasion, which is illegal, and conflating them and treating them as if they were the same. Anyone who tried to pay less taxes was a criminal as far as he was concerned emotionally. And, his Treasury Secretary, Henry Morgenthau, had the same attitude. And, that's wrong. All Americans know you have the right not to pay the taxes you don't know. And, it scared everyone. And, what's more, it was hypocritical. There was a Greenspan in that period, it was Andrew Mellon from the 20s. Mellon had served three presidents, or it was said three presidents served under him. He was very grand, and Roosevelt prosecuted him throughout the entire 30s, it would be like prosecuting Greenspan today, for tax evasion, which Mellon didn't do. Russ Roberts: This is just so shocking. Just make sure I get this right. He was dragged into court for taking deductions. Is that accurate? Amity Shlaes: He was dragged into court for taking deductions that he was allowed to take. And, in the 20s, Mellon would have liked the flat tax. Mellon liked a clean tax code. He didn't like special interest gifts. In fact, in the 20s, he had drawn up a list of the various tricks and the legal tricks, the various deductions and so on that were in the tax code with an aim to getting rid of them in the ideal world. And, in the 30s, what Roosevelt did was use that list against Mellon by showing, enumerating the various instances in which Mellon had used them. But, Mellon paid plenty of taxes, and he did it all legally. And, yet as a very old man, he turned 80 while in the courtroom, here he was being strung up. And, his son Paul says, it was terrible for him. He didn't say it was terrible for him because he was a Victorian personality and he didn't complain, Mellon, but it was clearly terrible. And, he died before it was all over. And, yet FDR didn't treat himself the same way. I have a letter he wrote to the Bureau of Internal Revenue, which is their IRS, about his own taxes. He said, 'I really don't know how much to pay, so you just have to love me and assume I'm being good.' He wrote to, it was Guy Helvering, the Commissioner of Internal Revenue, 'My taxes. This is a problem in higher mathematics. May I ask that the Bureau let me know the amount of the balance due?' Russ Roberts: That's amazing. Amity Shlaes: 'The payment of 15,000 doubtless represents a good deal, more than half what the eventual tax will prove to be,' i.e., he didn't pay his whole taxes and he couldn't be bothered by figuring out what they were. Russ Roberts: Well, and of course, we live in a world today where if you give your situation over to the IRS [Internal Revenue Service], the amount you actually owe has a somewhat random component. Since the tax code is so complex that different IRS agents will figure your tax differently, is my understanding, they've done a number of experiments that way. Amity Shlaes: Oh yeah, of course. And so, he turned people into criminals who were not criminals. And, I had some insight into the McCarthyism here, Russ, about this. Because when I grew up and I learned about McCarthyism and the attacks on people as communists in the 50s, one thing I learned was how mean the McCarthyites were. Those were Joe McCarthy and the others, right? Russ Roberts: Right. Amity Shlaes: Nixon? The outstanding thing about them was not whether or not the people they were targeting were communists. The outstanding thing about the whole situation was they had no decency. Have you no decency, sir? Right? Russ Roberts: They were vicious people. Amity Shlaes: They were vicious people, those Republicans who attacked the poor artists who were blacklisted, right? Setting aside the question of whether the people were working for Moscow, some were, some weren't, it was this issue of just the bad character of being so nasty. And, what I learned when I went back to the 30s, Russ, was where the Republicans learned how to be nasty. And, they learned it from the New Dealers because Roosevelt made up lists of taxpayers he wanted to target. The lists of McCarthy were foreshadowed by the lists of Roosevelt, where he targeted completely innocent people and smeared their name for no other purpose than class warfare. Russ Roberts: Now, one of the lessons here is that power is not a good thing. It corrupts people and it turns them arrogant, as you point out earlier in the discussion of the Schechter case. There's a remarkable amount of self-righteous arrogance that runs through some of the way these issues go. And, it is on both the left and right and Republican and Democrat. It's the way the game is played. It's a bloodsport, politics--it's ugly. Amity Shlaes: It's a bloodsport. Hoover was a Republican, Roosevelt was a Democrat. Roosevelt himself, I got very much into his character too, he was a control freak. Also temperament. In his instance, I believe illness figured here strongly because he was in discomfort if not pain throughout the presidency every day. And, a person in that much pain has a little bit of a shorter attention span. He's more restless, he's more impulsive. It's all about getting away from the pain or the discomfort. And, you see that with FDR when he was shifting gears, changing all the time, moving the tiller, he was constantly seeking to avoid the pain. And, I believe that also informed his Presidency. |
| 53:55 | Russ Roberts: One thing we haven't talked about is the rule of law, and it really was at risk because of that relentless tinkering and the use of regulation at both the personal and political level. It's a dangerous time. A lot of people justify it ex post arguing that, well, it could have been worse. It could have ended up like the Soviets. We could have ended up like the Nazis, and we had a little of it. And, I think there's some truth to that. But in America, the Constitution is supposed to protect us from those abuses. And, we came perilously close to totally losing it there. And, I think we paid a price. We lost a lot of the protection of the Constitution in those years that we never got back. Amity Shlaes: Especially the part about the contract. Russ Roberts: Why do you say that? Amity Shlaes: Our culture of contract was weakened by the New Deal. The contract between two people or a government and an individual was weakened for sake of more general laws. One of the advisors of Roosevelt, and I follow him all the way through the book, I came to like him very much, was a collectivist of sort of the left-wing part of the administration, a fellow named Rex Tugwell. And, he really did want to do European economy of scale model. And, he was honest about it, and that's why I liked him. He wasn't a political animal, and he failed because he was insufficiently political. He believed in collectivism or the economy of scale very, very much. And, he wanted big control things. And, I described all the things he was for in the book, and it's very controversial, but after he left the administration, in part because he was too left-wing, he was more or less thrown out, he decided his big project was to write the Constitution. Russ Roberts: Lucky us. Amity Shlaes: That's about where a lot of them came out, the Constitution is too old. It's bad. It needs to be rewritten. We need to change it. That's really what Roosevelt was saying after Schechter, when he deplored Schechter and said that Schechter set the country back to the horse and buggy age. He said, 'Modern means change, including to the Constitution, or at the very least, we need to have expansive reinterpretation of the Constitution.' Russ Roberts: Well, I have to mention, it's one of my favorite things about living in the DC area is if you go down to the Jefferson Memorial, which is a thing a lot of people have done, and there's nice quotes on the walls. And, one of the quotes though, which is not particularly Jeffersonian in my mind, is about how important it's to be flexible and how we need government to be flexible. And, the Constitution, I don't think it's mentioned explicitly, but it's about our political system needs to be flexible. And, it was built during the Roosevelt administrations, and I always felt that that was Roosevelt's way of trying to justify some of the flexibility he wishes were there that I don't think Jefferson would have been so excited about. Amity Shlaes: Well, I don't know about--I think Jefferson--these days, people are debating a lot about what Lincoln meant and did. Jefferson's another one. There are many Jeffersons. Some kind of Democrats claim him for something. Some kind of Republicans claim him. So, he's a wonderful topic to debate. |
| 57:17 | Russ Roberts: Yeah. Well, we're getting low on time. I want to mention one other thing that you don't get into in the book that I'd like your thoughts on, because I'm sure you've looked into it. I started this discussion with a sort of stereotypical view of the depression, that Hoover did nothing. As a result, the economy plunged into disaster. And, fortunately Roosevelt came along, understood that government had to fix it, and he did. There's been a revision of that over the last, I'd say, 10 or 15 years in the public mind. Now there's a view. The new stereotype is often described this way. Well, Roosevelt tried really hard. He wasn't very successful. The New Deal didn't end the Depression. And, as you point out in the book, in the late 30s, we had a huge downturn again. There was some progress in the economy in the early part of the Roosevelt years, but then in 1937, 1938, we had another major recession and unemployment soared again. So, the revisionist view is, well, Roosevelt meant well, he wasn't successful. The war ended the depression. But, as Bob Higgs has pointed out, economic historian, and we'll put his paper up on the website, some of his papers, maybe the war didn't end it either. This atmosphere of uncertainty that Roosevelt created through this relentless reform and tinkering and trying this, and that really made it much harder for the economy to recover from the downturn. Amity Shlaes: Maybe the war didn't end it either. And, I want to say that Bob Higgs's work was very important to me in writing this book. And, if you want to know about the cost of uncertainty, one important place to go is to Bob Higgs. Secondly, I'd say the salient question is not did the war end the Depression or not, but why did the Depression last so long? Our forerunners, Russ, have looked at how the economy recovered a bit late, around chicken time and so on, or mid-30s, but it did not come back. Recovery is sort of a misleading word. It did not come back, GDP, until late, late in the 30s. The economy was not where it had been, and the market didn't come back until the 50s. So, it's a very, very profound thing. Russ Roberts: Yeah. Your book ends in 1940 with the election of 1940 though, so you don't get into that. But, it's bizarre how this one event looms so large in our economic and political mythology. We'd had many serious recessions before that we would call depressions, 1894 was one, for example, but they were always relatively short-lived. The persistence of the Great Depression changed economics and politics in America forever. And, we still live with its legacy in so many ways. Amity Shlaes: Oh, absolutely. I just came across a sentence that is Roosevelt at his most aggressive, and I wanted to read it. It's from his second inaugural. He said-- Russ Roberts: This would be 1936? Amity Shlaes: 1937. Russ Roberts: 1937, yeah. Amity Shlaes: Having one in 1936, taken all but two states, 46 of 48 states. 'We were beginning to wipe out the line that divides the practical from the ideal. And, in so doing, we are fashioning an instrument of unimagined power for the establishment of a morally better world.' Hard to hear. Even Al Gore wouldn't talk like that today. Russ Roberts: Yeah, it's pretty confident. Amity Shlaes: Pretty confident, right? Whoa. Russ Roberts: And, of course, one of the things you talk about in the book is the creation of the Social Security Administration, which was 1936, if I remember correctly. Amity Shlaes: Well, they passed the law-- Russ Roberts: In 1936? Amity Shlaes: in 1935. Russ Roberts: Thirty-five? I thought it was 1936, but the first checks don't go out until-- Amity Shlaes: After the-- Russ Roberts: I think 1940. Amity Shlaes: People, they don't start paying into it either for a while. Russ Roberts: And, the amounts of course are very, very small, both on the tax and the benefits side. There's a nice line in the book about how the taxes are never going to go up. They're never going to be higher than a certain amount. I can't remember the amount, but of course it's a bizarre example today. But, that's just one example of the literal legacy of the New Deal, obviously the Social Security Administration and the Social Security tax, and unfortunately the commingling of the ideas that the payroll tax as funding your account. That whole myth started with Roosevelt and it hampers us to this day and reforming the tax system and dealing with the Baby Boom. It's just one more challenge we'll be facing over the next few years. Amity Shlaes: Well, absolutely. The New Dealers had a lot of fun and many authors, including friend, Jonathan Alter, have written about how we need to have that kind of fun and really be aggressive about rewriting politics. But, what I argue in this book is their fund precluded ours. If you look at the range of political candidates now, even over on the right, Mitt Romney is not calling for the kind of reform that would actually assure that the U.S. economy stays strong and competitive over the coming generation. They don't dare, and that comes out of the New Deal. Russ Roberts: Yeah, that's true. And, also, I always like to make a plug for economic education. I think if people understood economics better, we'd have better economic policies, as my colleague Bryan Kaplan writes about in his latest books. I think there's hope, but you're right, what is acceptable and what is on the table and what is off the table is very much a product of the New Deal's political struggles and their aftermath. Amity Shlaes: My title is The< Forgotten Man/em>, but the forgotten man in this book, well, at least one of them, is today's voter. |
| 1:03:22 | Russ Roberts: Yeah, well actually, close with that if you would. The title of the book, it's a very haunting idea. The book's called The Forgotten Man, and you contrast Roosevelt's image of the forgotten man with an earlier image that came out of, was it William Sumner Graham? Amity Shlaes: Well, this is, I think very, very important and we never learned it, right? Russ Roberts: Nope. Amity Shlaes: Roosevelt spoke of the forgotten man at the bottom of the economic pyramid. So, that was his Forgotten man, the very poor man, say the homeless man. Russ Roberts: The little guy. Amity Shlaes: The little guy at the very, bottom. Russ Roberts: Excuse me, William Graham Sumner is the [inaudible 01:03:59]. Amity Shlaes: But, he took this phrase from an important teacher called William Graham Sumner, who was at Yale and who wrote essentially a national bestseller in the 1880s called The Forgotten Man. Roosevelt probably didn't remember that he took it, but it was a phrase that was in the air. And, by the 'forgotten man,' Sumner meant something completely different. His forgotten man was the man who subsidizes the dubious progressive project, the one who pays. And, nowadays, we're still in that debate. Who is the forgotten man? The one who gets the benefit or the one who pays for the benefit, and more and more, it's Sumner's forgotten man who matters because most of us are Sumner's forgotten men. We are the taxpayer. Sumner wrote, 'He is the man who is never thought of. He works, he votes, generally, he prays, but he always pays.' That was in the 19th century, and it still holds. Russ Roberts: Yeah. I'd like to read the earlier part of the quote, which you have at the frontispiece of the book. Amity Shlaes: Oh, the algebra? Russ Roberts: Yeah. May I? Amity Shlaes: Yes, you may. Russ Roberts: [From Shlaes' frontispiece, written by William Graham Sumner:] As soon as A observes something which seems to him to be wrong from which X is suffering, A talks it over with B, and A and B, then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B and C shall do for X. What I want to do is look up C. I want to show you what manner of man he is. I call him the forgotten man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. That's an 1883 quote. Still has a lot of wisdom for today. Amity Shlaes: Thank you so much, Russ. Russ Roberts: My guest today has Ben Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression. Amity, thanks for joining us. Amity Shlaes: Take care. |
READER COMMENTS
Chris Meisenzahl
Jun 4 2007 at 9:13am
Great podcast Dr. Roberts, just wrapping this book up, on topic.
FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression
http://www.amazon.com/FDRs-Folly-Roosevelt-Prolonged-Depression/dp/0761501657
muirgeo
Jun 4 2007 at 9:37am
Great discussion. Thank you and I me that in spite of the pendantic rant to follow. Let me recap from my perspective.
First the Great Depression was in no way related to the 40 years of prior laissez faire economic policies. Nor the prior to depressions I assume. It in good part can be blamed on Keynesian missteps by Hoover an otherwise great man free-market kinda man. Roosevelt, if he only knew what we know now could have and should have steered a straight course to recovery. The Economic Royalist were persecuted by the Roosevelt administration via shrewd approaches to class warfare.
Pardon my sarcasm because I look at history as it followed the Roosevelt “disaster”. A great war fought and won and the post war recovery a remarkable success. Great expansion of the middle class and a worlds leading economy through the 70’s.
I can point to all sorts of success here and in Europe of mixed economies. I can only see cycles of boom and bust and corruption and concentration of wealth any time I look to economies as ours prior to the Great Depression.
I admit to my sparse understanding of economic issues and have Capitalism and Freedom and the Road to Serfdom on deck in my reading list. Any other relevant suggestions based on my rankings above? I really do want to believe the world is better the simpler we think of it. I like things simple. But here I live in the real world and could use a bit of convincing.
Russ Roberts
Jun 4 2007 at 9:57am
Muirgeo,
Let me try and sum up what I think I understand about the Great Depression. Hoover did little once it was started in motion. But he wasn’t as laissez-faire as I’ve always thought. Shlaes argues that his lecturing to business about the need to keep employment and wages up made it hard for businesses to survive the downturn. I don’t know if that’s true. I don’t know if businesses listened or not but it’s an interesting point.
Roosevelt’s policies in the 1930s were a hodge-podge of various attempts to increase demand, increase prices for agricultural goods and micro-manage the economy (the NRA). Some of those policies had modest success. Some were disastrous. But it’s hard to argue that they ended the Depression when you look at the 1938 unemployment figures. Read the Higgs articles in the reading list above. They are not technical and are very interesting.
Many economists (but not all) believe that poor monetary policy kept the economy from recovering. Our improved understanding of monetary policy has definitely reduced the fluctuations in the economy known as the business cycle.
The war and Roosevelt’s philosophy of government were two different things to me. Fighting the Nazis didn’t create the middle class.
Mixed economies (ours included) do pretty well. I’m not convinced their mixed nature has much or anything to do with reducing the boom and bust cycle or reducing inequality. What is clear to me is that the relatively free nature of America’s labor market creates a more dynamic and innovative economy than Europe’s. I think it’s better for the worker here as well, though that is certainly debatable. Let’s see what happens over the next five years. I think Europe is going to have an increasingly difficult time sustaining its policies.
Do read Capitalism and Freedom. It will give you much to think about.
And remember, we are always interested in what might make things better. Our economy and life here in the US is very good. I presume it could be better. I’m interested in what policies we might pursue that might improve things and what policies we might stop pursuing that might improve things. But I wouldn’t want to attribute our current success say, to our public school system just because we have an active public school system and the economy is healthy. I think with a different educational system, we could do even better. Economics can help us understand the issues in that debate.
amity
Jun 4 2007 at 10:32am
Thanks for the comments!
I meant to include a list of Depression books and works that seemed important:
Ray Moley, “After Seven Years”
Jim Powell, “FDR’s Folly,” great policy book
Robert Higgs, “Depression War and Cold War”
Edward C Banfield, “Government Project” (about a failed American version of Animal Farm)
“Great Projects,” James Tobin
Harold Evans “They Made America”
Burton Folsom’s book on the Depression — forthcoming
Tugwell’s Diaries
Steve Neal’s “Dark Horse” on Willkie
Moley is the man who would speak to us today. He was the first true neocon. I use the word “neocon” to refer to economics, not foreign policy. Willkie also said it all on econ, but only before the election. After 1940 he went in a different direction.
Amity
Chris Meisenzahl
Jun 4 2007 at 10:55am
Dr. Roberts, I took particular interest to the discussion of the size of the money supply and Irving Fisher around the 36 minute mark or so.
I struggle w/ the idea that there can be “too little” money available. Of course $20 worth of one dollar bills isn’t divisible enough for a country of 300 people. But what difference is there between say 5 trillion worth of M1 and 7 trillion worth of M1 in the money supply? The change in the money supply itself, ceteris parabus, creates no new wealth, right?
Can you expand a bit on why the money supply needs to expand? I also had trouble with this concept when listening to Dr. Friedman’s podcasts. I remember once reading a question, “What is the proper amount of money in an economy?” The answer was, “Any amount.” 😉
I was under the impression that simply adding money just caused inflation? I don’t intend this post to be provocative at all, really trying to understand these concepts. 😉
Thanks very much in advance,
Chris
http://amateureconblog.blogspot.com/
Lauren
Jun 4 2007 at 11:44am
Hi, Chris.
You are right that the phrase “there is too little money” is tricky. You are also right that it is usually meaningless, since there cannot be too little money in an accounting sense. The price level simply falls to match.
The crux of one legitimate use the phrase “too little money” arises when, in a banking crisis, the Federal Reserve doesn’t make enough printed money available temporarily. This doesn’t happen much any more because the Fed has really learned about this, but it happened at the beginning of the Great Depression, and even till the 1970s.
Here’s what used to happen: If a bank appeared to be about to fail, word would get out, and people would line up outside the bank hoping to get whatever cash the bank had on hand before it closed its doors forever. That was called a bank run.
Some bank failures are legitimate. The bank really has mismanaged its affairs and should be driven out of business.
Other times, though, a whole series of banks can be caught up in either a business downturn that does not reflect on their long-run ability to stay in business, or merely a speculative frenzy on the part of their customers. Either way, people line up outside the bank’s doors in a panic.
A well-run bank makes its money not by sitting on the cash it takes in as deposits, but by lending the money out. The bank is required by the Fed to hold some cash in reserve (ironically, it is not allowed to use that in the event of a bank run); and most banks hold a little extra, depending on their expectations of daily demands for cash. If too many customers in a given day line up outside its doors, a bank may temporarily run out of cash on hand.
That’s when the Fed is supposed to step in. It is supposed to act as the lender of last resort–that is, to quickly deliver cash to a bank in good standing to cover the bank in such an unusual event. The bank, by having the cash, can reassure its customers that it is solvent; and presumably they will re-deposit the money and the bank can repay the Fed.
At the time of the Great Depression, this lender-of-last-resort role was not well-understood by the Fed; or if it was understood, it was not acted on quickly enough or emphatically enough. Consequently, legitimate, solvent banks found themselves literally without enough money. And without enough money they could not reassure their customers that they were legitimate; and hence the banks needlessly went out of business.
Some of this is discussed in Chapter 7 of Friedman and Schwartz’s A Monetary History of the United States, called “The Great Contraction.” It’s exciting, though not light, reading, and I recommend it highly.
The Todd
Jun 4 2007 at 12:07pm
I don’t really think bank runs are what they were referring to in the podcast, Lauren, but maybe I just misunderstood.
Lauren
Jun 4 2007 at 12:19pm
The Todd, I don’t think you are necessarily mistaken. I found that portion of the podcast unclear also.
If not bank runs, though, there is only one other possibly legitimate use of the term “too little money,” having to do with Gresham’s Law.
Gresham’s Law only applies when there are fixed exchange rates (e.g., a gold standard). During the period, there was not literally a fixed exchange rate; but the exchange rate was fixed by a strong expectation of return to a fixed standard, which might have been enough.
Gresham’s Law is discussed very well in The Natural Law of Money, by William Brough. There’s an introduction that also may help.
Chris Meisenzahl
Jun 4 2007 at 12:49pm
Thanks very much Lauren, that was helpful. But one thing I wonder about the instance of the Fed stepping in with cash at the 11th hour … Is the Fed taking extant cash from somewhere else? Or is it just creating money out of thin air, printing and inflating?
Chris
Lauren
Jun 4 2007 at 12:53pm
Here’s one more possibility for a reasonable use of the term “too little money”.
It might mean “too little money growth relative to expectations.”
Friedman and Schwartz, in their three chapters on the Great Depression, emphasized not only the importance of the Fed’s role as a lender of last resort, but also the importance of the Fed’s behaving in a way that was not erratic. In order for people to make daily plans for saving and spending, and to make contracts for the future, people had to know what to expect for future inflation or deflation.
If the Fed jerked the money supply around (which it certainly did during the Great Depression), suddenly raising and equally suddenly lowering its growth rate, there might end up being too little money relative to expectations. In that case, interest rates would be contractually set too high, and lenders would benefit unduly at the expense of borrowers.
Hmmm–I think this might be what was being discussed. Maybe three times’ the charm!
Lauren
Jun 4 2007 at 1:01pm
Chris asked another good question:
The Fed is printing the money when it acts as lender of last resort. The idea is that because the money creation is going to be very short term (a matter of overnight or perhaps just a few days, till citizens calm down and the cash is redeposited into the banks), there will either be no inflation, or an immediate compensating deflation. (Why? As soon as the money is redeposited by reassured citizens, the bank that frantically borrowed the cash from the Fed can repay the Fed’s loan. The Fed then “burns” the money–the opposite of printing it. Of course, in reality it doesn’t literally burn it. The cash is, though, out of circulation, as if it had never been printed at all.)
At any rate, loans of term over a few days shouldn’t be affected–particularly not if people are aware that the Fed is doing its job as the lender of last resort. That the Fed should clearly tell the public what it is doing was also one of Friedman’s prescriptions. (Fed secrecy has been mitigated since the 1970s; but is not complete. However, the Fed’s behavior and depositor insurance such as the FDIC have gone a long way toward reassuring bank depositors in the cases of bank failures.)
Russ Roberts
Jun 4 2007 at 1:21pm
The Todd,
You’re right—I wasn’t talking about bank runs but about a different problem when the money supply is contracting.
When the money supply is contracting, prices and wages fall— what’s known as deflation. In one sense, deflation’s no big deal—your salary is lower but goods are cheaper, too. So it’s possible that there is no real effect on your purchasing power.
The problem occurs with loans. If lenders and borrowers anticipate the deflation, that just lowers the market interest rate. Expected inflation raises the rate. The idea is that if both borrowers and lenders expect prices to change while the loan is outstanding, then how much you have to pay down the road to get someone to give up money today is going to be different than if prices are stable. Some of our readers/listeners might remember the 1970s when interest rates were near 20%. That was because inflation was high and to get people to lend money, you had to offer a premium to compensate for the fact that when you paid them back, the money wouldn’t go as far.
But suppose the change in prices is not anticipated. It’s unexpected. Then you borrow money to finance your house, thinking that your salary will be able to support the loan payments. Then there’s deflation. Wages and prices fall. Interest rates fall. But you borrowed your money in the past at a higher interest rate. Your new lower salary is going to make it tough to make your mortgage payments. It’s one of the reasons there were defaults.
The other reason is much more obvious. It’s hard enough to make your mortgage payments when wages are falling. But it’s particularly hard when you’re unemployed. When unemployment is 25% as it was in 1933, a lot of people default.
The other contractionary aspect of deflation (when it’s unexpected) is businesses see the price of their product falling. They don’t know easily, especially at first, if this price fall is particular to their product or part of an economy-wide deflation. Some businesses will assume that it’s particular to their business and will lay off workers as a way to stay in business at the new lower prices.
The point is that a contracting money supply when people haven’t experienced it and aren’t expecting it can have real effects that are very destructive.
August
Jun 4 2007 at 7:14pm
I enjoyed this podcast very much.
My questions are:
Why is the FedReserve a good thing? Isn’t it a government institution that should be abolished in favor of a free market?
Would the great depression actually have something to do with this? http://www.pbs.org/wgbh/amex/flood/timeline/timeline2.html
Sure, bad government policies make things worse, but ever since I’ve learned of the great flood, I’ve wondered why nobody mentions it in conjunction with the great depression. Is the South, agriculture and all, truly meaningless to the health of the American economy?
Jacob Tomaw
Jun 5 2007 at 9:42am
Isn’t unexpected de-/in-flation a risk of doing business? Why is it good for the government need to create more money by fiat to counteract this? It seems like the ability to set the price of money is worse than all the other price controls government might impose.
I have read Murry Rothbard and other Austrians work on money and they talk about fiat money and government created inflation (no matter how small) dampening the signals that the price of money is supposed to send, causing suppliers and consumers of debt and credit to not see the risk. If there had been no fiat money or a real gold standard how would the situation would be different.
I hope The Todd, Lauren, Chris, and I are representative of a larger group and more podcasts about money supply are in out future.
Nathan
Jun 5 2007 at 11:55am
Great podcast once again!
I wonder why, even though in the U.S. we’ve gotten to a low stable inflation rate, we haven’t gotten to the 0% rate that I believe Friedman endorsed. My theory is that since government is (always?) a net debtor, and since inflation favors debtors, and since government sets monetary policy, there is always pressure to keep the inflation rate positive. Any truth to this?
Lauren
Jun 6 2007 at 6:46am
Hi, Nathan.
It’s an interesting question. Your hypothesis, however, won’t work. Only unexpected inflation favors debtors. If inflation is stable at 5%, contracts will build that into interest rates, and no one gets hurt or benefits unduly when the payoff time comes around.
Since this podcast talked about Irving Fisher, it’s the perfect moment to point out that Fisher’s The Theory of Interest is the classic work explaining how real and nominal interest rates interact with expected inflation. The graphs and case-by-case examples enlightened generations of young economists and inspired the graphs used to represent the intertemporal models that replaced and revised the one-period simple Keynesian and classical analyses.
The simplified formula is
i = r + (π)^e
where
i = nominal rate of interest at the time of the loan-writing
r = the (expected but presumably relatively constant) real rate of interest
(π)^e = the expected inflation rate
(π, the Greek character, is commonly used in economics for the inflation rate, not for the mathematical constant; similarly e is used in economics for expectations, not the math constant)
Only if the actual inflation rate doesn’t turn out to equal the expected inflation rate does one or the other party to the loan benefit at the other’s expense (because the payoff for the loan turns out to be worth more or less than originally anticipated when used to buy goods). At the time of the payoff, i and (π)^(actual) are done deals, so the r^(actual) received by the lender and paid by the borrower turns out to be different from r.
Your idea, though, does partly explain why governments do not want to commit by law to a fixed monetary growth rule. Governments want to reserve themselves the flexibility of inflating without warning in cases of crisis. (Even then, citizens can partly anticipate the government’s likelihood to inflate, driving up the open-market interest rate the government has to contract in order to borrow.) A low stable rate maintained for a long time does influence the market’s expectation for that stability and low rate to continue.
Matt C.
Jun 7 2007 at 10:09am
I think the best part of the Ogden Nash poem is the actually the last part, in my humble opinion.
Abracadabra, thus we learn
The more you create, the less you earn.
The less you earn, the more you’re given,
The less you lead, the more you’re driven,
The more destroyed, the more they feed,
The more you pay, the more they need,
The more you earn, the less you keep,
And now I lay me down to sleep.
I pray the Lord my soul to take
If the tax-collector hasn’t got it before I wake.
Matt C.
Jun 7 2007 at 10:11am
I find it interesting that Rothbard was not brought up. He has written several books about the depression and the impact of the Fed and the other government’s policies.
Tim
Jun 25 2007 at 8:08pm
What a great interview.
There is a documentary film made by the Australian ABC about Herbert Hoover’s time in Australia where he played a major role in converting the Western Australian goldfields from a “gold rush” boom town situation to a modern industrial operation equipped with hundreds of kilometres of water piped in from the south-west etc.
The documentary is called “Hoover’s Gold” and is available for sale on-line here.
Tim
Jun 25 2007 at 11:56pm
The discussion about how the extreme and divisive tactics of many of the New Dealers provoked the “blowback” of McCarthyism was touched on briefly by a recent article on “CounterPunch”.
See article here.
The relevant passage is:
“There is a pamphlet called “The Chickens of the Interventionist Liberals Have Come Home to Roost” by Harry Elmer Barnes. Written in 1973 it was directed against the liberals who thought nothing about smearing or destroying the lives and the reputations of the old liberal academics who wrote prescient books in the 1930’s about the policies of FDR, what the consequences of those policies might mean for us and for the world. Barnes’ screed meant to remind these people who were bitter about eventually getting McCarthyized that they once had been just as vicious against free speech when it served their purposes, war. Chickens roosting he wrote.”
Barnes, himself a social democrat, in his “Chickens” pamphlet details the sins against civil liberties taken by pro-FDR liberals during the New Deal and WW2.
Tim
Jun 26 2007 at 6:27am
By the way, there is a blog dedicated to discussing Hoover’s experience in the Western Australian gold mining industry here. There is an article here on how Hoover made his fame and fortune in the Westralian goldfields, and even what may be some love poems young Hoover may have penned here.
Comments are closed.