With the possible exception of the Civil War, no event has transformed American politics more fully than the Great Depression. From the stock market crash of 1929 through U.S. entry into World War II, the country's economy floundered tragically, with the unemployment rate typically in the high teens. First under the misguided and generally ineffective policies of President Herbert Hoover and later under those of Franklin Delano Roosevelt, the federal government became increasingly interventionist, at times attempting to dictate all aspects of economic production.
When accepting the Democratic Party's presidential nomination in 1932, Roosevelt proclaimed "a new deal" for the American people. Once in office, he began radically transforming the federal government while seeking to ameliorate the nation's woes. He pushed subsidies for farmers, changed the banking system, and created the National Recovery Administration, which regulated many aspects of business until it was declared unconstitutional in 1935. Through the creation of the Social Security system and related programs, Roosevelt vastly expanded the scope and size of the federal government and created the political world in which we live. The shift was so complete that even as vocal a foe of big government as Ronald Reagan, who started his political career as a New Deal Democrat, approvingly wrote to Congress in the early 1980s of the "nation's ironclad commitment to Social Security" and praised FDR's visionary leadership in creating the program.
In her meticulously researched new history of the Depression, The Forgotten Man (HarperCollins), journalist Amity Shlaes describes the received catechism of the era: "Roosevelt made things better by taking charge. His New Deal inspired and tided the country over. In this way, the country fended off revolution of the sort bringing down Europe. Without the New Deal, we would all have been lost.…The attitude is that the New Deal is the best model we have for what government must do for weak members of society, in both times of crises and times of stability." But that conventional account, she writes, fails to capture "the realities of the period." Shlaes shows how both Hoover and Roosevelt "overestimated the value of government planning" and intensified and prolonged the very problems they were seeking to fix.
Told in a rich narrative style, The Forgotten Man follows dozens of historical figures through the Depression, weaving the stories of people as varied as American Civil Liberties Union co-founder Roger Baldwin, Alcoholics Anonymous creator Bill Wilson, power utility magnate (and failed presidential candidate) Wendell Willkie, and African-American evangelist Father Divine into a rich human tapestry. In this, the book calls to mind one of the Depression's landmark literary texts, John Dos Passos' U.S.A. trilogy (1930–36).
Shlaes is a columnist for Bloomberg and a senior fellow at the Council on Foreign Relations. A former member of the editorial board at The Wall Street Journal, she is also the author of The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It (2000) and Germany: The Empire Within (1991).
In June she was interviewed on C-SPAN's After Words program by reason Editor-in-Chief Nick Gillespie. What follows is an edited transcript of that program, which can be viewed online at reason.tv. Comments can be sent to firstname.lastname@example.org.
reason: Your book is subtitled "a new history of the Great Depression." What's new about your take?
Amity Shlaes: One of the important things about the existing argument is that it's all about Keynesianism, about whether government spending can cure the economy when it's ill. Scholars have overlooked the cost of uncertainty in an economy, what we would now call the "unknown unknowns." Both the Hoover and Roosevelt administrations (but especially the Roosevelt administration) were so unpredictable. That hurt the economy very much, and when I went back and saw the extent I was astounded. Uncertainty is a factor that I thought needed to be explored. There were lots of people who said, "I will not invest 'til I know what's going to happen."
During the Depression, you heard the phrase "bold, persistent experimentation" all the time. We've been taught that was good. Somebody had to do something, was what we learned. But what I saw was this enormous cost, especially during the second half of the 1930s.
There's a second thing too. I look at the government's action using the lens of public choice theory. Very simply, public choice says that government is no better or worse than a business, it's a competitor. Sometimes I use a crustacean image; The government is like a lobster. It will eat anything, it wants to survive, it will compete with anything, and it can be a cannibal. When you look back at the '30s using the public choice lens, what you discover is the extent to which the Depression wasn't about a virtuous government and bad business people. Rather, it was about people in office competing with the private sector for power. Much of the struggle described in the book literally inhered in the power business: utilities. There's something about power that attracts strong people. And of course the government wins and the private sector loses in the form of the Tennessee Valley Authority, which was created in 1933.
reason: Where does your title, The Forgotten Man, come from?
Shlaes: In 1932, on a radio program called The Lucky Strike Hour, Franklin Roosevelt gave a speech that was written in part by Ray Moley, his adviser. Moley was a man you'd want to have at your dinner table today. He was a wonderful, wonderful man. In that speech Roosevelt spoke of the "forgotten man at the bottom of the economic pyramid." Moley wrote to his sister that he wasn't quite sure where he had gotten the phrase, but it was in the air.
In the late 19th century, there was a book, a collection of essays, called The Forgotten Man and a famous lecture called "The Forgotten Man." The author was a Yale professor called William Graham Sumner, who had quite a different forgotten man in mind. He put it algebraically. Sumner said a wants to help x, with x being the man at the bottom. And b wants to help x too. That's our philanthropic impulse, we want to help. There's nothing wrong with that. We all have that impulse to provide charity. It becomes a problem when a and b get together and pass a perhaps-dubious law that coerces c into funding their maybe-good project for x. In Sumner's original version, c is the forgotten man, the man who pays, the man who prays, the man who is not thought of.
That phrase meant a lot to people at the time, and when Roosevelt people debated Hoover people they were all familiar with William Graham Sumner. So [Roosevelt's supporters] said, "You have the wrong forgotten man! The forgotten man is the man waiting for the recovery that you are not delivering or that you are preventing."
I think Sumner's concept of the forgotten man also has to do with today. When you talk about the upcoming presidential election, you see great powerhouses, the Democratic powerhouse (Hillary Clinton) and the Republican powerhouse (maybe McCain, maybe someone else). And the individual voter says, "Where do I fit into this? I feel like the forgotten man." There's something very un-fun about this election as it's beginning to unfold. Given our challenges with the funding of entitlement programs, the forgotten man in the future will be the generation who will pay for what Roosevelt created during the Depression.
reason: You note that there were similarities between Hoover and Roosevelt, at least in the early stages of dealing with the Depression. Obviously, FDR was a lot more successful as a politician, but he and Hoover shared certain types of mentalities and even certain policy inclinations. Talk about what Hoover did wrong and how Roosevelt built on that.
Shlaes: Hoover was a good man, and electing him was like electing Bill Gates or Mike Bloomberg, or electing some other capitalist figure as president. In 1928 the country said, "We want a businessman to rationalize our country." There was nothing wrong with some aspects of that, but Hoover had the wrong temperament. He had been Coolidge's secretary of commerce and he did have an enormous talent for organizing humanitarian efforts, such as the relief effort for the Great Flood of 1927, which ravaged areas along the Mississippi River. Before that, he'd been very successful in business. The voters thought, "Let's get somebody from the private sector as president and bring that success to government." But government is a different animal than the private sector. Hoover was an engineer. He was a control freak. He would rather have control than do what was right. That's a harsh thing to say, but you see it happening over and over again.
When the stock market crashed in 1929, he did some bad things. One was he called business leaders together and said, "Don't drop wages or prices." He didn't give business a free rein to handle the downturn. In 1930 he signed the Smoot-Hawley Tariff, which raised tariffs to historically high levels. That sent a terrible international signal.
It was in the Republican Party's platform to like tariffs; Republicans liked tariffs at that point. It was wrong, but they did. They thought a high tariff was good for business. It's not good for business generally; it's just good for the certain businessman who has the influence with politicians.
Hoover probably knew better. He had lived in London; he had lived in Asia. He was a man who had generated significant economic growth in his businesses. He had a thousand professors—even some from his own university, Stanford—write to him saying, "Don't sign this tariff; it's bad." And yet he signed it.
Hoover does get blamed for something that he doesn't deserve. People today say, "Oh, he ought to have spent as a Keynesian would, and the government would have made the economy grow." We want to remember that the government was very small when he was president. The federal government was smaller than state and local governments at the time. It spent something like the equivalent of 2 percent or 3 percent of gross domestic product. Now it's 18 percent to 20 percent.
reason: What was happening at the Federal Reserve?
Shlaes: The Fed was young. It had only been founded in the 1910s. They didn't really know what they were doing. Neither Roosevelt nor Hoover understood that the country was in a deflation, that they were having a money drought. Bank problems were a large factor too. I don't think they really understood what was going on with money or that you could create more money. They were in the gold standard culture. But there was a professor whom I came to know and like in the period, Irving Fisher. He would go around and say, basically, "There must be more money!"
Some towns realized this. They made their own money. They manufactured it. In the book, you can see pictures of the scrip that they created. It often had a moral component. In Salt Lake City, they had a currency called the "valor."
The Fed should have made money easier to obtain. The concept that we have today—much of this book is history, not economics—of open market economics, where the government buys bonds or sells bonds to soak up money from the economy, was not especially developed at that time. And the gold standard functioned differently anyhow. If you want to make an argument against the gold standard, this is the example. The Depression was the Hurricane Katrina of gold standard policy. The absolute worst picture you can get of the gold standard is this period, because people did go hungry.
reason: Hoover had a terrible four years and got smoked in the '32 election by FDR, who, among other things, also lifted Prohibition.
Shlaes: Right. That was part of the sale, the knowledge that Roosevelt would do that. He always had a gift for the voters. In the '32 election, he gave liquor. (And there were significant revenues that came with legalizing liquor.) In the '36 election, he gave spending.
He also created the Securities and Exchange Commission, which I'm generally in favor of. This is not a totally libertarian book. I think it's OK to have the Fed and OK to have the SEC and OK to have clear rules in the game.
reason: Because they limit the uncertainty, which in the end is worse than even a bad policy that's certain?
Shlaes: Yes. But there were other things that he did in his first 100 days, and that was the problem. Central to it was changing the economics of agriculture and saying, "We will pay you not to produce. We will limit supply, either by plowing under or limiting acreage"—that sort of thing.
reason: Where did his farm policy come from? FDR always talked about helping people, but what he did was actually set price floors at a time when people were going hungry. This isn't exactly what the typical FDR devotee fully understands.
Shlaes: Well, the interest group was the farmers. Roosevelt was elected in part by the farm vote. They wanted the kind of high prices they had had before World War I. They had a significant drop in their prices, something on the order of 30 percent to 40 percent. Looking back, we might say that more of America should have moved to the city faster, which is what they did eventually anyhow.
He put Henry Wallace, a figure they knew, in as agriculture secretary. The administration made a bunch of rules. They put in a tax on middlemen, on the theory that that would help the farmers and that middlemen got in the way of efficiency rather than helped efficiency, which is what we think today.
Then there was an analogous beast in the business sphere called the National Industrial Recovery Act, which created the National Recovery Administration and which had a whole bunch of philosophies behind it, copying a little bit from Britain, copying definitely the German cartel system, and copying what Stalin was doing.
Roosevelt's advisers didn't know Stalin was a monster, or at least not so much, and very naively they copied him. In the book I trace how some of the characters go to the Soviet Union in 1927 and are bowled over by Stalin. They get six hours with him and they come back and you see them, especially [former Columbia University professor] Rex Tugwell, implementing things they learned from fascist Italy or from the world of Stalin. The influence of these European entities from Russia to Italy was not parenthetical. These people were not working for Moscow, but they were influenced by Moscow.
One of the members of the junket was a very well-known writer named Stuart Chase, an accountant who wrote about economics. He wrote a book called The New Deal, and it appeared in 1932, and that's where Roosevelt got the phrase. The last sentence of Chase's book is, "Why should Russians have all the fun remaking a world?" So you see the continuity.
There was a romance with the economy of scale, and not just in America. FDR's advisers said that having so many different states and so many different ways of doing things was inefficient. If you had 50 flowers blooming, as federalists would have, they bloom differently and it makes for a messy garden. There was this sense that the economy couldn't grow further unless there was rationalization, standardization. Even now you'll see businessmen fighting for standardization: "Just make the rule!" they say.
reason: You follow Tugwell, who was born in 1891 and died in 1979, through the book. In many ways, he emerges as the paradigmatic New Dealer. Tell his story.
Shlaes: I liked Tugwell very much because he was honest. He loved Roosevelt and Roosevelt loved him, but The Forgotten Man is also a book about policy agony. It's about what happens when you go into government and you do your best and you're not appreciated and the thing that you produced is not what you planned and nobody cares.
Tugwell worked in the Department of Agriculture. He became part of something called the Resettlement Administration, where they moved people around—as described by John Steinbeck in various works. Tugwell saw a lot of poverty, the Dust Bowl, and so on. He saw that a lot of the projects weren't really working. Some worked: Fertilizer worked, and so did money so farms wouldn't have to be sold or closed. But a lot of it didn't work and he had a lot of ambivalence.
He made planned communities, such as Greenbelt, Maryland, and he cozied up to Eleanor Roosevelt. They drank champagne made in New York state, which Roosevelt thought was awful and it probably was.
And then they kind of threw him out. But not before he had laid the plans for his own little Soviet farm, which was in Casa Grande, Arizona. He put settlers in to make a town; he gave them houses. There were people like the migrant workers in the photographs. These were people with nothing. They signed up for the town, and they were supposed to work together and have economies of scale and just one tractor they could share.
What's wonderful is that Tugwell was honest about it and admitted it wasn't working. Later, he discovered that the settlers in the little farm hadn't worked together, that they had fought, that they had trashed the community house. They wanted milking machines, for example, which is a completely rational thing to want since it increases productivity. But the authorities didn't want them because part of the thesis was that you should be creating jobs, and you take away a job when you have a machine.
All these fallacies were underlying everything, and Tugwell saw that too. He tried to go back to Columbia and they wouldn't have him, even though he had an apartment on Riverside Drive. So he kind of went around in the private sector and eventually did get his reward: He became governor of Puerto Rico, where he encouraged land reform that had too much of an aspect of appropriation for my taste. And then he spent a lot of years trying to rewrite the Constitution, because he concluded the New Deal had failed because of the Constitution. If only we had a more modern constitution, he thought.
reason: You write that an economist of the time lambasted the NRA as the National Retardation Affair. It was also often derided as Nuts Running America. Effectively, it was an attempt to oversee virtually all aspects of the economy. How did it play out?
Shlaes: With Roosevelt in the White House, America was supposed to be about the little man, the forgotten man. But this was a cartel arrangement, or close to it, where big companies wrote codes that made it hard for little companies to survive.
In the '30s a right-wing think tank had a look at the NRA, which was a whole bunch of rules in every state, a sort of mixture of government and industry where industry was supposedly self-governing but not really. And this big right-wing think tank concluded after a thousand pages that the NRA was retarding recovery. The name of that think tank was the Brookings Institution. Roosevelt had people from all quarters telling him that this isn't working, and it was eventually challenged in the Supreme Court, lost, and had to be disbanded. The rules for agriculture, of course, are still with us.
In retrospect it was wonderful that the Supreme Court said no National Recovery Administration for the business sector. Parts of it were reincarnated later. Many of the labor components, for instance, came back as the Wagner Act. But the governing-the-economy-by-rules thing didn't come back quite the same way.
reason: One of the most important stories you tell is about the family butchers who helped kill the NRA.
Shlaes: The Schechter brothers ran a small chicken slaughter business; they were kosher butchers in Brooklyn. They were prosecuted by the Justice Department under the NRA. They were the case that was picked by the government to go to the Supreme Court to prove the constitutionality of the NRA. I thought that this was a wonderful story, and we never learned it in school because it was against FDR. But it was an important, important story.
The Commerce Clause limits what the federal government can do in the states. The laws have to pertain to interstate commerce. What is interstate commerce, and did the NRA breach that? Everyone knew there needed to be a test. So this chicken business was picked because in another case chickens had been defined as interstate commerce.
The Schechters were prosecuted very nastily, for a lot of sins. Lowering prices, that was illegal. Working too many hours, that was bad, bad. Competing. What I liked about them was that they were furious. They realized that what the government was saying was wrong. To them it seemed probably like the czar's Russia, where their family had come from.
The government's lawyers talked down to them. The lawyers kept saying things like, "You're not an economist; you don't have any agricultural economics." And they would say, "No, I don't have much school; I barely speak English"—their English was mocked. But when they got to the Supreme Court, their argument won because of the logic.
Their lawyer said, "One of the rules of the NRA is that the customer may not pick his chicken. America's about customer choice." This was a time when there was still tuberculosis and no antibiotics. Picking your own chicken was important for health reasons. You didn't want a sick chicken—their case is known as the "Sick Chicken Case"—and the justices sided with the Schechters. They said, "This is delegation run riot, what about the Commerce Clause," and so on.
There was a lot of discussion around that, and it was an enormous event because if the NRA had stood, we'd have the same kind of intervention in business as we have in agriculture. So it shifted America forever.
reason: What do we gain from a study of the Depression, particularly a revisionist understanding of it?
Shlaes: One lesson is that you do not need to mess with the economy for it to recover. In fact, messing with the economy can retard recovery. You do not need to go into war mode—the NRA was headed by an actual general, Gen. Hugh Johnson—when there is a downturn. The economy has a lot of inherent strength, and there's plenty of evidence that it would have recovered much sooner—maybe by 1936—had Roosevelt not asked for the mandate of "unimagined power" to change everything in his second inaugural address.
reason: It wouldn't go over well today to say that as president you want "unimagined power." At least, not so openly. Isn't there a strange paradox at work in American politics? We have a much better understanding of economics and of how government interventions often have unintended, and usually negative, consequences. Free market ideas really triumphed in the second half of the 20th century. Yet as a percentage of the economy, government spending is far greater than it was during the Depression.
Shlaes: That challenge of two opposing ideas is one reason I wrote the book. The most important thing for our generation is that the New Deal will come back to bite our children when they pay yet higher payroll taxes because we did not dare to reform Social Security and other entitlements. There are not enough people to pay for Social Security, and Social Security is set up so that you can't fix it just by growing the economy.
This is a moment of choice for us, our generation and the younger people. We have to look again at Roosevelt. Roosevelt was inspiring. He was right on World War II, but we do not have to have false nostalgia for his wrongheaded policies in the '30s. We should warn our children and help to change Social Security, but you don't see that in the presidential candidates. You don't see daring on Social Security.
I'm an old-fashioned liberal, and a lot of this book is about the death of that kind of liberalism—liberalism in the European sense. I'm the sort of liberal who cares a lot about the individual, the forgotten man; I emphasize that rather than the group or the aggregate. My very first job was at The New Republic, where I wrote an article that parents shouldn't know when girls under 18 had abortions. It was called "The Squeal Squad." That was the liberal in me. It was, "Leave me alone, even if I'm a child."
I have great faith in the individual, and I think it's time for a re-evaluation of the [term] liberal in America. The Republicans were wrong to try to smear Democrats with that word. Ronald Reagan was right when he said it is a good word. Democrats and Republicans should both use it, and we should re-examine traditional liberalism if we can.