The Forgotten Man by Amity Shlaes

[rusty charly]

"The Forgotten Man" emphasizes selectively-picked "moving stories of individual Americans" against government elites, which incorrectly frames the debate as government intervention ruining recovery versus supposedly free markets before the New Deal, but that is not historically accurate. Before the New Deal, the economy was not free from long-standing flawed policies by big business and the Republican Party that had caused several depressions, panics, and volatility over many decades before the New Deal, again and again. (That is not meant to offend Republicans or business people today.) Those volatile flawed policies caused the Great Depression.

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The real debate is FDR's pragmatic willingness to do something to confront the economic catastrophe, versus the old flawed policies. FDR said they should try something new and if it worked, great, and if not, try something else. The final result is that the New Deal cured the economy of the severe volatility. There has never again been another depression or panic since the New Deal reforms were enacted.

The GDP numbers and other statistics also show a strong economic recovery under FDR. He reversed the economic contraction, increased employment, and engineered a recovery as reflected in many statistics. Oddly, the "Forgotten Man" does not include the most important economic statistics. Even the GDP numbers are not included in "The Forgotten Man!" More telling, the unemployment numbers in "The Forgotten Man" do not seem to match the numbers in the Historical Statistics of the United States! Instead, the numbers in "The Forgotten Man" portray the unemployment numbers to be worse!

THE ECONOMIC STATISTICS SHOW A STRONG PERFORMANCE BY FDR, even if full employment did not return until World War Two. In 1933, the year that Roosevelt took power, GDP dropped only 4% to 56.4 billion as FDR stopped the worst of the crisis. In 1934 GDP grew a robust 17% to 66 billion. WOW! This strong growth was boosted by FDR's temporary job programs. In 1935, GDP grew 11% to 73.3 billion. In 1936, GDP grew 14% to 83.8 billion. In 1937, GDP grew 10% to 91.9 billion. GDP grew 63% from 1933 to 1937. Check those numbers.

The growth of personal income (money in the hands of consumers after taxes) grew at about the same robust rate as GDP over that time period. Personal income increased 45.5% from the beginning of 1933 through 1937. Gross private domestic investment increased a staggering 880.38% over that same time period! The Business Index in 1937 briefly reached the previous output peak of 110 before the Great Depression started in 1929. Roosevelt reversed the contraction, ended the Depression, and restored America's industrial prosperity to the pre-Depression level. Check and verify those numbers.

Federal Reserve Chairman Ben Bernanke, America's top economist, says in his excellent book Essays on the Great Depression (on page 248) that "between 1933 and 1937, employment in U.S. manufacturing rose by 3.4 percent per QUARTER, and output by 5.0 percent per QUARTER. He wrote (on page 253) that "the New Deal era, 1933-41, was a period of general economic growth." Real wages, productivity, and employment also grew substantially, according to Bernanke.

Unemployment fell to about 12 percent by 1937, about two-thirds less than when FDR took office. The employment figures do not include government work relief jobs building dams, roads, bridges, canals, aqueducts, park improvements, buildings, and other infrastructure improvements. If you include those jobs in the employment figures, unemployment fell to 4% by 1937 under FDR. However, it was not until World War II that the private sector reached full employment.

The economic explanation of the Great Depression as I understand it from leading economists is very different than the selective narrative of "The Forgotten Man." Read Bernanke's "Essays on the Great Depression," the best economics book on the Great Depression.

Milton Friedman and Anna Jacobson Schwartz also showed decisively that business uncertainty had nothing to do with the economic performance during the Great Depression in their classic Monetary History of the United States, 1867-1960, which helped Friedman win the Nobel Prize in economics.

Yet the main attack in "The Forgotten Man" is that FDR caused business uncertainty and it supposedly retarded private investment. What do the numbers say? The numbers say that gross private domestic investment increased 37.4% in 1933. It increased a staggering 111.9% in 1934. It increased 81.5% in 1935. It increased 28.9% in 1936. It increased 40.7% in 1937. Gross private domestic investment increased a staggering 880.38% from 1933 through 1938! The numbers seriously challenge the selective narrative of "The Forgotten Man."

Before the New Deal, the economy was very volatile over many decades. The New Deal rejected the flawed old policies and adopted new policies that cured the economy of severe volatility. Decades of stability and great prosperity have followed.

Before the New Deal, the Republican Party and big business had long advocated the flawed policies of high tariffs, weakly regulated financial markets waiting to collapse like a house of cards, a strictly balanced budget (even during downturns), and a disastrous gold standard that was restored when Calvin Coolidge was president and the Republicans dominated Congress. Times were very different back then. The real "forgotten man" was the "one-third of a nation," workers who did not share in America's prosperity (reducing consumer spending). They democratically felt it was a time for change.

One of the many flawed Republican tariffs since the Civil War was the McKinley Tariff of 1890, which raised import taxes to 48% to protect American corporations, and it quickly caused a depression. The bill was named after Congressman William McKinley, who later became president. The Democratic Party back then represented people in the South and Midwest, such as farmers, who opposed high tariffs. (Today Republican policies are different.)

In 1930, the Smoot-Hawley Tariff was pushed through Congress by big business and the Republican leadership. The Smoot-Hawley Tariff was named after Republican Reed Smoot and Republican Willis Hawley. Herbert Hoover only reluctantly signed the Smoot-Hawley Tariff. Hoover should not be selectively blamed for the Smoot-Hawley Tariff.

Hoover's biggest mistake was his continued support of the disastrous gold standard, which was reestablished in 1925 when the Republicans controlled Congress and Republican Calvin Coolidge was president, after being suspended during World War I. Four years later the gold standard contributed to a massive contraction of the money supply by the Federal Reserve, related to the gold standard. The Federal Reserve, tied to the gold standard, caused the start of the Great Depression. (Essays on the Great Depression, Ben Bernanke; Monetary History of the United States, Milton Friedman and Anna Jacobson Schwartz) Hoover and the Republican leadership refused to leave the disastrous gold standard, as Britain wisely had, because that was the conventional thinking.

To keep the budget strictly balanced during the economic downturn and maintain business confidence, which was the long-standing conventional thinking, Hoover and the Republican Congress raised taxes.

Over 10,000 banks collapsed, which caused a sharp drop in lending activity and contracted the money supply even more. America's financial system lay in ruin.

GDP dropped over 40% from 1929 to 1932. The long-standing conventional economic thinking was flawed: tariffs, weakly regulated financial markets, and a sound currency based on a strictly balanced budget and the flawed gold standard. Yet "The Forgotten Man" does not feature those long-standing economic policies. Instead, it seems to remove Hoover from his own party and then handcuff FDR to Hoover.

Once FDR took office, he sharply departed from the flawed economic thinking of the day. The pragmatic Roosevelt removed America from the gold standard, and a recovery began. Check the GDP numbers. The countries that left the gold standard soonest, such as Britain, recovered the soonest. The countries that stuck to the gold standard the longest suffered the longest. The countries that were never on the gold-standard avoided the Depression entirely. (Essays on the Great Depression, Ben Bernanke) But leaving the gold standard enraged many traditional "hard currency" business leaders and Republican leaders.

FDR's first "100 Days" also rescued the financial industry from ruin through a bank holiday and sensible regulations, such as the creation of the SEC, with requirements for transparent financial statements and annual audits. Back then the banks were the backbone of the finance industry.

Ben Bernanke, Chairman of the Federal Reserve and America's top economist, gave a terrific speech at Washington and Lee University on March 2, 2004, explaining the economics of the Great Depression. You can easily search and find the entire speech. Bernanke said that the Federal Reserve caused the Depression when it constricted the money supply again and again. The gold standard caused a run on the gold supply, followed by further Fed tightening of the money supply to defend the currency, leading to widespread bank panics, which constricted the money supply further due to the sharp drop in bank loans and the loss of consumer confidence in the financial services industry, which was hardly regulated.

Bernanke said, "One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level. The new President also addressed another major source of monetary contraction, the ongoing banking crisis. Within days of his inauguration, Roosevelt declared a "bank holiday," shutting down all the banks in the country. Banks were allowed to reopen only when certified to be in sound financial condition. Roosevelt pursued other measures to stabilize the banking system as well, such as the creation of a deposit insurance program. With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly."

Ronald Reagan wrote of his deep admiration for FDR in Reagan's autobiography An American Life. Reagan wrote (on page 66), "I cast my first vote for Roosevelt and the full Democratic ticket. And like Jack - and millions of other Americans - I soon idolized FDR. He'd entered the White House facing a national emergency as grim as any the country had ever faced and, acting quickly, he had implemented a plan of action to deal with the crisis. During his fireside chats, his strong, gentle, confident voice resonated across the nation with an eloquence that brought comfort and resilience to a nation caught up in a storm and reassured us that we could lick any problem. I will never forget him for that." Reagan wrote that he voted for FDR four times, and President Reagan also worked to have the FDR Memorial built on the National Mall.

The American people reelected Franklin Roosevelt by the biggest electoral landslide of the 20th Century, winning with 98.5% of the electoral votes. Only George Washington and James Monroe received a higher percentage of the electoral votes. FDR also won 60.7% of the popular vote. Americans approved of FDR's performance.

FDR restored hope to millions of Americans. The White House had to hire five people to handle the avalanche of mail. One of those writing to FDR was Elmer Jones, President of Wells Fargo and Co. He wrote, "Although I am a Republican and a friend of those other great presidents Theodore Roosevelt, the late President Taft, and former President Hoover, I desire to avail myself of this opportunity to congratulate you on your sound speech tonight which has just come over the radio in magnificent manner. You are doing a grand job under the most difficult circumstances and justly deserve the individual and collective support and sympathy of every true American who puts his country needs above party politics of personal interests. I congratulate you and wish you success." (The People and the President, Lawrence Lavine and Cornelia Levine)

J. Paul Getty, the richest man in the world in his time, got incredibly rich during the 1930s. Getty endorsed the reforms for economic stability that came from the New Deal (see his autobiography) and voted to reelect FDR, "whose policies he strongly supported." (The House of Getty, Russell Miller) Getty in the 1970s called FDR "a great president." Forbes Morgan of the Morgan clan worked for FDR.

Sidney Weinberg, senior partner at Goldman-Sachs, served in FDR's first two administrations, and he said, "FDR saved the system... You could have had a rebellion; you could have had a civil war." David Kennedy, Richard Nixon's Treasury secretary, voted for FDR twice. John Hersch, a senior partner of a Chicago brokerage house, said, "It took this guy with the long cigarette holder to do some planning about basic things-like the SEC and the WPA and even the lousy Blue Eagle. It put a new spirit in the country." (Hard Times: An Oral History of the Great Depression, Studs Terkel) Peter Drucker, the legendary business management guru, wrote that FDR and Truman had the best cabinets of any presidents. (The Essential Drucker, Peter Drucker)

Norman Thomas, the Socialist Labor Party candidate for president, attacked FDR for undermining socialism and saving capitalism. When a reporter asked if the New Deal had carried out the socialist program, Thomas replied that the New Deal had carried it out on a stretcher.

Yet the selective stories in "The Forgotten Man" do not include the business leaders Getty or Morgan or Jones or Weinberg or Reagan or the millions of Americans who adored FDR. Instead, "The Forgotten Man" tells the selective story of Mellon and others.

The economy would not have self-corrected on its own. Read Lessons from the Great Depression (Lionel Robbins Lectures). The constrictive gold standard was an ongoing disaster and would have continued to strangle the economy. Read Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (NBER Series on Long-Term Factors in Economic Development). Over 10,000 banks had collapsed. The stock market had crashed, with many people and institutions leveraged on high margins. Read The Great Crash 1929. The financial system lay in ruin. FDR's instinctive departure from the conventional thinking of the day was needed.

Unfortunately, after the strong GDP growth of 1933-37, the Federal Reserve caused a sharp recession in late 1937. According to Fed Chairman Bernanke and Nobel Prize-winning Friedman, Federal Reserve actions are to blame for the recession of 1937-38. (Bernanke; Friedman and Schwartz) Making matters worse, Treasure Secretary Morgenthau talked FDR into cutting fiscal stimulus to balance the budget and restore business confidence - the flawed thinking that originally caused the Depression. Morgenthau quickly touted this news to the business community.

Following the recession of 1937-38, the economy again grew strongly. According to Bernanke in "Essays on the Great Depression," "The recession of 1937-38 was followed by another strong recovery: quarterly growth rates for manufacturing employment, hours, and input in 1938-40 were 1.8, 2.8, and 4.9 percent, respectively." Check the numbers.

At the time, nobody understood what had happened. Modern macroeconomics had not yet been invented. Nobody should be blamed for the start of the Great Depression, the long-standing flawed policies before the Great Depression, or the 1937-38 recession. The Great Depression prompted bright minds to experiment and develop solutions so it would not happen again. Keynes was the first to solve the riddle. Monetary economics would come later.

Critics selectively use the recession of 1937-38 to declare that the New Deal was a failure, understating the growth before and after the 1937-38 recession. "The Forgotten Man" begins with a narrative about a 13-year old named William Troeller who commits suicide because of his family's depressing economic problems. "The Forgotten Man" then explains that this did not occur shortly after the Great Crash in 1929 or even during the depths of the Great Depression in 1932 when Hoover was president. Instead, this occurred in 1937, "five years after Franklin Roosevelt was elected and four and a half after Franklin Roosevelt introduced the New Deal."

What do the GDP numbers say for all the years of Roosevelt's presidency, 1933-1945, and not just the recession of 1937-38? The GDP numbers were good. Also, GDP has been much more stable and prosperous in the decades after the New Deal than before. Check the numbers. As Ronald Reagan once said, "Trust, but verify."

The economy since the New Deal has been more stable and prosperous. Prior to the New Deal, there were numerous economic depressions in American history. There was the severe Secondary Postwar Depression from about 1874-1880. There was the severe recession from about 1883-1886. There was the serious Panic of 1893, which resulted in two consecutive severe depressions over five years and a banking panic. There was the Rich Man's Panic around 1904. There was the severe Panic of 1907 resulting in a severe depression and a bank panic. There was the severe Primary Postwar Depression following World War I. Ever since the New Deal, there has never again been a severe depression.

John Steele Gordon, an advocate of free markets, wrote a wonderful profile of the New Deal (pages 336-346) in his masterpiece history called Empire of Wealth: The Epic History of American Economic Power (P.S.). He wrote," While many of the New Deal programs were unsuccessful and many of its economic principles shortsighted, in its totality it was an enormous success. The country since the New Deal has been a far richer, far more economically secure, far more just society. It has been one that has proved to offer far more opportunity for all and produce far more wealth as a consequence... There has never been a serious political effort to reverse the New Deal."

Reagan wrote in his autobiography "An American Life" and "The Reagan Diaries" that he was not trying to undo the New Deal. Instead, Reagan was trying to undo the excesses of 1960s-70s liberalism and excessive regulations. The core New Deal safeguards are still with us today.

The New Deal created the Security and Exchange Commission (SEC) for safer financial markets and transparency in financial reporting. The FDIC ended bank panics. The FHA created 30-year mortgages, transforming America from a nation of renters into owners. Note that the recent meltdown in the mortgage market involved non-FHA mortgages. The American economy could have crashed long ago without these New Deal safeguards. Be thankful for the New Deal.

The New Deal created the Open Market Committee to manage the money supply. Social Security has provided a steady stream of fiscal stimulus into the economy, dampening sharp downturns. Unemployment insurance has allowed for a manageable system of job eliminations and then redirects back into the economy. Rural electrification transformed rural communities. The Fair Labor Standards Act banned the worst child labor, created the minimum wage, and included the 40-hour work week. Huge public works projects and credit (dams, aqueducts, water, energy, buildings, bridges, etc.) built-up the infrastructure, mainly in the Southwest, West and South, making FDR the most important president for the development of the West. (These types of investments had been common in American history since the earliest days of the country and were especially common in the Northeast during the Gilded Age).

The G.I. Bill gave college to millions for the first time. FDR made possible America's modern economy based on educated workers. "Empire of Wealth" includes an excellent chapter on the Post-War Boom following WWII. Built on the New Deal reforms, Americans realized unprecedented prosperity in the many decades that followed.

Education achievement for children greatly improved during the New Deal years. The number of children attending high school jumped 43%, and the number of high school graduates doubled from 1930 to 1940. (The Greatest Generation Grows Up, Kriste Lindemeyer)

The New Deal did NOT take over private enterprise or make a large entry into markets, except for the TVA and small experiments. And yet "The Forgotten Man" selectively features Wendell Wilkie and the TVA, which could leave the impression that the New Deal was more involved in government planning than it was. There are better books than the selective "Forgotten Man."

"The Forgotten Man" blames FDR for hurting business confidence, keeping business investment shackled due to uncertainty. There is truth to this, but gross private domestic investment actually increased a staggering 880.38% from 1933 through 1938! Milton Friedman also completely refutes business uncertainty in favor of monetary forces in "Monetary History." Also, my thinking, influenced by my understanding of the economics of investment, is that investment is driven by profit. If there is a profit to be made, someone will take risk and invest and gain that profit. If a business person sees no profit to be had, no investment will be made. Demand comes before investment. Expected profit from demand will attract investment. Yet during the Great Depression, there was too much unused capacity, making any further investments unprofitable.

Roosevelt restored industrial activity from less than 20% capacity when he took office to about 80% capacity in 1937. If there was still 20% unused capacity, why would businesses invest in even more capacity? Corporations have always been willing to take big risks, such as investing in foreign markets, when a profit can be made, but the profit must be there to take. Investment simply reached an equilibrium point below full employment because there was not enough fiscal stimulus or money supply to create new demands requiring new investments. The demand did not exist.

World War Two and the need to retool plants for entirely different products with massive deficit spending finally unshackled investment capital to meet that new demand. Prior to that, FDR was too cautious to deficit spend in a big way until WWII.

FDR made mistakes. Ronald Reagan, when criticized for his mistakes, invoked FDR's example of a batter who strikes out 65% of the time is considered a great batter. (An American Life, Ronald Reagan) FDR sensed that the conventional economic thinking was wrong, and so he said that they should try something new and if it worked, great; and if not, get rid of it and try something else. FDR was an experimenter who distrusted so called "experts," despite the emphasis in "The Forgotten man" on FDR's academic advisors. It was JFK, not FDR, who loved the Ivy league policy-makers. FDR was an instinctive leader and a heavyweight politician.

The best introduction to FDR seems to be the recently-released FDR by the excellent historian Jean Edward Smith. A great FDR biography from a conservative's perspective is the huge but entertaining Franklin Delano Roosevelt: Champion Of Freedom by the conservative Conrad Black. "The Economist" magazine called it "a masterpiece." It also received good reviews from conservatives William F. Buckley, Henry Kissinger, John Lukacs and George Will. Ironically, the SEC, created by FDR, has given Black some legal problems. For a terrific history that is critical of FDR's policies, yet well-written, read the Pulitzer Prize-winning Freedom from Fear: The American People in Depression and War, 1929-1945 (Oxford History of the United States) by David Kennedy (no relation to Nixon's Treasury secretary). I suggest reading a good biography of FDR before reading that history. There are better books than "The Forgotten Man."

Important economic history is missing from "The Forgotten Man." Missing from "The Forgotten Man" is FDR's great leadership to restore hope, his successes that brought about a moderate recovery from 1933-37 as expressed in the GDP numbers and other statistics, the long-standing flawed policies in the many decades before the New Deal, and the enduring positive reforms of the New Deal.