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Monday, July 30, 2007

David Warsh on Amity Shlaes' "The Forgotten Man: A New History of the Great Depression"

David Warsh takes a look at Amity Shlaes' The Forgotten Man: A New History of the Great Depression and finds that it is "an elaborate cautionary tale..., designed to support a particular interpretation of the present by selective reference to the past." This is part of a longer review:

Good Old Cal?, by David Warsh, Economic Principles: ...Amity Shlaes' The Forgotten Man: A New History of the Great Depression ... is not fiction, though it reads almost as smoothly as if it were a novel. But neither is it professional history. (The author is a veteran journalist and Bloomberg columnist.) Perhaps it could be thought of as ... an account of various versions of the great event, the interpretations ventured both by those who lived through it and by those who sought to manage it and justify their actions to the public.

Probably it is more accurate, though, to describe it as an elaborate cautionary tale (464 pages), designed to support a particular interpretation of the present by selective reference to the past.

For this purpose, Shlaes ... rehabilitates Calvin Coolidge, thirtieth president of the United States (1923-29), the small-government conservative who is best remembered for his advice to newspaper editors, "After all, the chief business of the American people is business." It is Coolidge who might be understood as representative of the "forgotten man" of the title.

("Forgotten man" was a political shibboleth during the '30s, akin to "silent majority" in the '70s, except that it was employed by all sides to rally followers. So in the course of the book, the term moves around like a pea under so many walnut shells... In the end, however, there can be little doubt that Shlaes has in mind the "minimalist president" Coolidge -- and his alter-ego, the business saint Andrew Mellon.) ...

The 1920s, the "Roaring Twenties," had been a time of unparalleled change in daily life: electrification, automobiles, telephones, refrigerators, radios, airplanes. Nor was there any reason to doubt that the cornucopia of new goods would continue -- as would the financial revolution that accompanied it, consider the peroration with which Hoover accepted the Republican presidential nomination in 1928:

"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but, given a chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation."

What the world got instead was the Great Depression. It began with the stock market Crash of October 1929, and for a time people hoped that would be all -- a short purgation, like the Depression of 1921-22, followed by a rapid rebound. But gradually the hard times settled in and spread. ... The Depression wasn't so bad if you had a job, went the joke, but something like a quarter of the population had lost their jobs by 1932. Recovery came haltingly, at best. Ten years later, neither output nor employment had regained their levels of 1929. Only when World War II loomed did the economy resume its rapid growth.

It was, of course, Roosevelt who eclipsed Hoover in 1932: night and day ... to those who lived through the times. Shlaes makes no attempt to ground her history in the experience of a generation, however. Instead, she lumps Hoover and Roosevelt together as apostles of collective action: big public works projects, new banking regulations, schemes to support prices, diminish competition and to raise taxes to balance the budget. ...

Her hero is Coolidge, who preferred his Treasury secretary, Mellon, to Hoover, who was his Commerce secretary. He privately disparaged the latter as "wonderboy" and complained, "That man has offered me unsolicited advice for six years, all of it bad." Not for Coolidge alarums and excursions. His chief skill lay in "refraining," says Shlaes. ...

Shlaes bends over backwards to avoid the creepy style of an earlier generation of Roosevelt-haters. Sen. Joseph McCarthy was "wrong," she says. The problem with "the New Dealers on the left" was not their relationship with Moscow or the Communist Party in the United States. "The problem was [the left New Dealers'] naïveté about the economic value of Soviet-style or European-style collectivism -- and the fact they forced such collectivism on their own country."

Both Hoover and Roosevelt habitually doctored the country, she says. "Hoover was a constitutionalist and take pains to intervene within the rules -- but his interventions were substantial. Roosevelt cared little for constitutional niceties and believed they blocked progress. His remedies were on a greater scale and often inspired by socialist or fascist models abroad." And it these schemes, enacted into law, has a "crushing impact" on the economy for which "American are still pay for today," according to the material accompanying the book.

But ... it is hard to think what she means. What are the enduring interventions that we sum up as "the New Deal?" The modern Federal Reserve Board. The Securities and Exchange Commission. National unemployment insurance. The Social Security Administration. The National Labor Relations Act.

To be sure, the last decade has seen a concerted assault on some of these institutions, on Social Security in particular. It was led by George W. Bush and New Gingrich, and supported by many professional economists. So little success did they meet, however, that the fundamental institutional reforms of the 1930s seem intact. A modest intergenerational financial "safety net," federal regulation of financial markets, government responsibility for management of the business cycle: these mandates seem as strong as at any time in their seventy-five year history. ...

What then /did/cause cause the Great Depression? According to Shlaes, an overheated market, culminating in the October Crash of 1929, had something to do with it. So did bad banking policy and protectionism. "But the deepest problem was the intervention, the lack of faith in the marketplace. Government management of the late 1920s and 1930s hurt the economy... Fear froze the economy, but that uncertainty itself might be a cost was something the young experimenters simply did not consider." But for the air of emergency fostered by "the world of theory, the world of the pilgrims," the economy would have quickly equilibrated by itself, with wages and share prices quickly "marked to market." The Depression would have gone into the history books as no more severe than the short, sharp "liquidation" that began the '20s -- a "quarter-hour" in the history of the American republic in Andrew Mellon's memorable phrase.

There is very little support for this idea among professional economists. Consult Essays on the Great Depression by Ben S. Bernake, for example, and you will learn that a majority of macroeconomists have concluded in recent years that prolonged adherence to the gold standard played a dominating role in determining the worldwide monetary contraction of the 1930s. "We do not yet have our hands on the grail by any means," he writes, but countries that left the gold standard early were able to reflate their monetary supplies and price levels, while countries that remained on gold were forced into further deflation. In other words, some approaching a consensus exists among economists that poorly-designed institutions and short-sighted policies were at the heart of the Great Depression. ... (About this considerable volume of work, Shlaes has very little to say. ...) ...

Shlaes ... seems to argue that we would be better off if John Maynard Keynes had never written what she describes as a "license for perpetual experimentation" with macroeconomic policies, if the extension of rights and responsibilities summarized by the phrase "the New Deal" had never occurred. But what about the enormous growth of the American economy since 1946? What about the seventy five years that have passed without another depression?

Turn back the clock to the 1923? What's next, I kept wondering: A "new history" of Abraham Lincoln's presidency and the Civil War? ...

    Posted by on Monday, July 30, 2007 at 12:15 PM in Economics | Permalink  TrackBack (0)  Comments (18)


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