FDR – did he or didn’t he end the Depression?

Fascinating discussion of the topic between Conrad Black and Amity Shlaes at NRO.

One of my all-time favorite professors liked to say, “What ended the Depression was: we collected all the steel, rubber, copper, lumber, etc., and sank it to the bottom of two oceans.”    

In general, the history curriculum argued that FDR’s “bold, persistent experimentation” gave the country an optimistic lift.  He was like a quarterback:  call a play, and if it worked, run it again; if it didn’t, call another.  Others argue (persuasively, imho) that it created a climate of uncertainty not unlike what we have now:  businesses won’t hire until they know what their costs and regulations are.  Shlaes puts it cleverly:

But the gist of my argument, made in numerous places, is that the key event in bringing an end to the so-called Depression within the Depression of the late 1930s was the New Dealers’ exhaustion. Roosevelt and others turned away from the home front and looked to the war abroad instead. Finding itself a partner rather than a target, business revived. Another way to put it: The big question is not how World War II ended the Depression; it is why the Depression lasted until the war. All other things being equal, the U.S. economy likes to recover. Eventually, it opted to.

… At many points, the president vilified businesses to an extent that made the country believe he was declaring war on business. In his 1936 Madison Square Garden speech, Roosevelt called businessmen “the enemies of peace.” He went on to say of business: “I welcome their hatred. I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.” It would be hard to imagine such a thing being said today.

…Conrad writes that Roosevelt never went after the rich personally: “If he [FDR] had once singled out by name the ‘malefactors of great wealth’ and exploited the anger of the Depression-scourged masses, they would have burned down the houses of the rich.”

Roosevelt did name names, ignoring the resistance of administration lawyers. The way he did it was by singling wealthy people out for public prosecution for violating tax law. Many went to court or jail. “Everyone in tax trouble,” Morgenthau reports telling his staff, “is against Mr. Roosevelt.”

…My own research and that of others suggests that the argument that the U.S. was close to revolution is exaggerated. The potential for unprecedented unrest existed in the early 1930s (a Katrina of a period), but not later. What instability there was stemmed in good part from the left-wing policies of the New Dealers, most especially the Wagner Act, which, at least unadjudicated and unrevised, as it was early on, gave unions the license for the violent sit-down strikes that tore the country apart in the latter 1930s.

UPDATE 9/6/10:

Victor Davis Hanson chips in at The Corner, If Only It Were WWII Again:

Paul Krugman has written yet another piece warning us that we have not borrowed enough (after we took his advice to borrow massively and got little results). We are facing a 1938-like downturn, he says, and so we need to borrow massively as if we were in something like World War II — the assumption being that, in the 1940s, the economy was jump-started by the war, got into high gear, and created the sort of revenues that make massive debt manageable.

I’m not an economist, but as an historian, I consider this an abject misreading of the postwar period, at least through the early 1950s. The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.

As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound — often receiving cheap oil, gas, minerals, and interest in exchange, which supplemented our own vast supplies of comparatively cheap and easily recoverable resources. Nor should we forget the psychological element: Americans, after winning two wars, were enormously confident about their newfound international stature and influence.

At home, four years of consumer deprivation during the war and the weak demography of the 1930s had combined to create huge demand, all while society was increasingly leaving the farm for good and becoming suburbanized. The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.

Today’s situation is not comparable: We are in hock to foreign creditors for trillions and have not been a net creditor since the 1980s. A China, Brazil, South Korea, Taiwan, or India is as or more likely to supply recovering demand for food, steel, or electronics. One can read Krugman-like arguments in Greek newspapers today — that only more massive borrowing can stimulate Greek demand, provide jobs, and grow Greece out of its recession. As if present-day deficits and aggregate debt with soon-to-be-rising interest payments don’t really matter.

UPDATE 9/7/10:

Amy Shlaes also responds to Krugman at e21 – Economic Policies for the 21st Century.

Roosevelt didn’t merely win a historic victory in 1936, taking 46 of 48 states. He committed to translating that electoral power to policy.  The President spoke in his 1937 inaugural of “fashioning an instrument of unimagined power” with government, a phrase so bold no modern president, Democratic or Republican, would dare to read if he saw it on a Teleprompter. Net private domestic investment went negative as companies sat on their hands rather than invest in this environment.

It is the combo of all these factors that caused the Depression within the Depression of 1937 and 1938.  My book, The Forgotten Man, stresses the taxes, labor costs and uncertainty. Since writing it, I’ve come to believe more emphasis out to be placed on the labor price.

There’s an additional point where Dr. Krugman’s narrative doesn’t make sense. From 1938, Dr. Krugman leaps ahead to World War II, to suggest that it ended the Depression. In doing so he omits to describe the recovery, incomplete but strong, of the second half of 1938 and 1939. In those years unemployment dropped a smidgen, but was still achingly high, due to the aforementioned labor policy.  But industrial production started to strengthen. After shrinking 3.4% in 1938, real GDP grew 8.1% in 1939 and 8.9% in 1940, before Pearl Harbor.

What might have caused this upturn? There were monetary factors. Gold flowed to the United States as the crisis in Europe worsened. Since the U.S. was on a form of the gold standard this meant an effective loosening of money. The inflow was not sterilized, but whether the heads at Treasury and the Fed understood the full import of the non-sterilizing decision is not clear. In a 1991 National Bureau of Economic Research working paper Christina Romer, who just retired as chair of the Council of Economic Advisors, stresses the importance of these gold inflows for recovery. You can also argue there were spending factors – the government grew as a share of the economy, although not in the massive fashion that Dr. Krugman prescribes.

But other factors in the 1938-1939 upturn were taxes and the diminishment of that uncertainty. In 1938, the political tide began to turn against Roosevelt. In the spring of 1938, lawmakers gutted his undistributed profits tax and dropped the graduated corporate income tax in spite of Roosevelt’s objections. Their bill became law without his signature. In the midterm Congressional elections of 1938, Democrats lost 81 seats, not enough to lose control of the House, but enough to chasten them. Bored and frustrated with the New Deal, FDR turned to foreign policy, an area to which he was better suited in any case. The Supreme Court ruled against sit down strikes, limiting the scope of union power. Washington’s war on business was suspended, in part because the president knew he would now need the same industrial giants he had prosecuted if he was going to arm the U.S. and Britain. Treasury Secretary Henry Morgenthau, who had personally sicced attorneys on his predecessor Andrew Mellon, now put a sign on his desk to signal friendship for business. The sign read “Does it contribute to recovery?” The policy mix of the late 1930s was far from ideal, but the direction was enough to cheer everyone.

The real question is not how war spending ended the Depression. It is why the Depression lasted so long. Spending, in any case, didn’t have much to do with the Depression’s end. As Dr. Romer herself summed up in that 1991 paper, “it is hard to argue that changes in government spending caused by the war were a major factor in the recovery. The recovery was nearly complete before the war had a noticeable fiscal impact.”

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