Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, recently addressed a John Locke Foundation Headliner luncheon in Raleigh. She also discussed her book, The Forgotten Man: A New History of the Great Depression, with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: When the stock market crashed in 1929, the United States fell into an economic tailspin. President Herbert Hoover and his Republican administration did nothing about it, thus paving the way for Democrat Franklin Roosevelt and his New Deal. Roosevelt’s programs helped America get back on its feet. If that story line sounds about right to you, you will be shocked to read the latest book from Amity Shlaes. Based on your book, I gather that there is almost nothing correct about that scenario I just outlined. Is that true, that what we learned in history class is probably not what really happened?
Shlaes: That’s correct. And not only that, but people knew it at the time. So that was a surprise to go back and see them telling us the way it was. Hoover was not a laissez faire person. He did a lot when the crash happened. He intervened but in counterproductive ways. For example, he raised taxes. He raised a tariff. He berated business and told it was bad and had to go in the corner. He, he—what else? He told employers they couldn’t lower wages when they were running out of money because of the downturn. It was a whole series of counterproductive things. Then along came Roosevelt and did some good things that we know about — helped the banks, helped people out with their mortgages — but also, as I develop in the book, a whole lot of counterproductive things himself throughout the ’30s.
Kokai: Sometimes the title of the book is just a catchy attention grabber. But in the case of your book, “the forgotten man” really is central to your theme. What’s the significance of “the forgotten man”?
Shlaes: Well, for FDR “the forgotten man” was an important phrase. He spoke of “the forgotten man” at the bottom of the economic pyramid in an important speech on the radio, on the Lucky Strike Hour, in his campaign. He was again speaking about the bottom man. But his phrase had a provenance. It was in the air, the phrase “the forgotten man,” and it came from a professor named William Graham Sumner who many decades before had spoken of another “forgotten man.” His “forgotten man” was the taxpayer who funds the government project for the first “forgotten man.” And the question is how are these two forgotten men pitted against one another —the man who pays the taxes and the recipient who gets the money and which is right and which is fair. And the reason that it matters today is we have this battle now, principally with entitlements, where young people are subsidizing their grandparents — through their Social Security, Medicare, Medicaid — but probably won’t get the same deal themselves.
Kokai: Now early in the book you identify and call as the deepest problem of the Depression, “the intervention, the lack of faith in the marketplace.” How was that the deepest problem of what we saw from the end of 1929 through World War II?
Shlaes: Well, this is very opposed to what we learn, but when I went and looked back at the ’20s in more recent work on the ’20s, we found that the ’20s weren’t just good but frivolous. They were good full stop. And there is a recent Nobel Prize winner named Prescott who wrote a paper about how the stock market in ’29 really wasn’t all that high. There has been serious work in the past 50 years on the economy showing, one, that the economy wasn’t in as bad a trouble as people made out in that regard. So that is the first revision. Second, there was a terrible deflation in this period, which I describe at great length. The money ran out. The money ran out so bad that people had to make their own Monopoly money and trade it.
But where is that the lack of government faith? If the government thinks all of what it sees in growth is inflation and very little is genuine growth, it is going to tighten. And that is what caused the deflation, basically, when the reality was there was a lot of growth in there and it was real growth. Maybe they shouldn’t have tightened so much in monetary terms. So that is there. And then in the ’30s, of course, in the New Deal, they believed that growth came from the government and ignored the fact that the best kind of growth tends to come from the private sector because that is where people do the most productive things that create more widgets and generate more stability. Government can make a job for a year, but it cannot make stability with a short-term fix-it job.
Kokai: We know Roosevelt today as the resolute war leader, the person who early on said, “The only thing we have to fear is fear itself.” But you say that during the Depression, “Roosevelt believed in a future of scarcity,” and later you add that the New Deal was causing the country to forgo prosperity, if not recovery. That sounds like a much more pessimistic attitude than what we have all learned about FDR and his role in bringing us back.
Shlaes: I think these days we suffer in history from what might be called “presidentism.” It’s all about the presidents, right? We move from president to president, and that is the history. Yes, of course, we need to know our leaders well. But no president is perfect. Roosevelt was a great war leader. He was the right man for the war. That should not allow the reality of what he did in the 1930s to be so obscured, and what he did in the 1930s was truly problematic. He was egregiously arrogant. He said, “We seek in government an instrument of unimagined power.” Can you imagine a presidential candidate today, not John Edwards, not Hillary Clinton, not Ron Paul, not Romney. No one would say, “We seek an instrument of unimagined power to create a higher order of things.” I am paraphrasing.
He was very, very arrogant. He attacked principles of property, and he had no understanding for the market and even for the American temperament of the small businessman. So that was a lot different from what I had studied as a child, reading books about FDR. My book seeks to give a reality revision, not an ideological revision, of the ambiguous character that he was in the ’30s.
Kokai: You don’t paint him as a villain, but you do point to some of the things that he did that just built upon other mistakes. You get the sense in reading this book that if he had just stopped at some point and let his various “reforms” stand, we would have been better off.
Shlaes: Politicians have their reasons, that they like reform for the sake of reform. But as we know here in the marketplace or when we are citizens that reform for the sake of reform is very costly in terms of uncertainty. If your child’s school is reformed six times from first grade to sixth grade, you know he doesn’t have a pleasant experience in that school and a lot of us know that, right? So we know No Child Left behind. We know stuff that changes sounds good, but change itself can be trouble.
And that was the New Deal. Roosevelt would do a reform. One day he loved big business. The next day he is suing them. Then he loves them again, breathing spell, then he is back at them. And even Keynes, the famous U.K. economist who was so important in that period, didn’t like it. He said to Roosevelt about utilities: either nationalize them or leave them alone. What’s the use of chasing them around the lot every other week? That’s the politician, and that’s what Roosevelt did. It’s the dark side of his famous phrase “bold, persistent experimentation.” People don’t like bold, persistent experimentation too much because they can’t get their bearings, and that’s a little bit of what happened in the ’30s — especially the latter half.
Kokai: You described government interventions. You describe dealing with the income tax for social reform, rather than just for revenue. Of the various things that you describe in The Forgotten Man, what are the main lessons that we should take away today as we are trying to figure out what policies should guide the U.S. in the future?
Shlaes: Well, there is no good government and bad private sector or good private sector and bad government. We are all people, and we all have good and evil in us. But what there are are power struggles. And you can look at the 1930s as good government trying to save a bad economy, but you can also look at it as a power struggle between the public sector and the private sector. — men in a room both trying to win. And you can see where they fought, what fields they picked. They picked the fields where the power was. They picked taxes. Who has the money? They picked monetary. Who has the money? And they picked the best industry of their day, their Internet, which was electricity, power. Literally, they fought over power. So once you see that you get a little skepticism about politicians. No politician is better than everyman, and no everyman is better than any politician.