Grasping Reality on TypePad, by Brad DeLong

The Great Depression was not only deep but long. A first, but perhaps not very important, reason was workers’ unwillingness to take risks, but rather to settle for what manner of living they could find that was most secure. Few people are willing to give up what they have—even if what they have is very small—if economic disorder means that their risks are likely to turn out badly, and that they may wind up with nothing at all.Whether in the U.S. in the 1930s, Europe in the 1930s, or Western Europe in the 1990s, prolonged high unemployment makes mass joblessness a near-permanent feature of the economy. The experience of long and high unemployment costs a large and deep shadow on the labor market: a phenomenon that Blanchard and Summers named hysteresis, in rather poor analogy with electromagnetism. Thus risky but profitable enterprises had a difficult time attracting the workers they needed, and so investment remained depressed.

The second reason it was long was the memory of and the belief that economies needed to get back to the gold standard. Those kept governments in the 1930s from taking many of the steps to boost production and employment they might have: the gold standard was dead by 1931, but its ghost continued to haunt the world economy. Thus few reflationary measures were undertaken. The one that was was currency depreciation: stimulating net exports by switching demand to and away from foreign-made goods. Commentators disparaged currency depreciation as “beggar-thy-neighbor”. It was. But it was the only thing generally undertaken that was effective.

The third was the lack of a hegemon to guide coordinated action in international monetary affairs. The major monetary powers of the world passed up their chances to do anything constructive together. Recovery, where it came, was national only, not global.

The persistence of the Great Depression shook the internal politics of almost every country in the world. In Scandinavia that social democratic parties had more-or-less successfully managed to navigate through the Great Depression put them into power for the succeeding half-century. In much of continental Europe Depression reinforced reaction: one of the gifts that the Great Depression gave the world was Spain’s long-lived fascist dictator, Generalissimo Francisco Franco; a second such gift was Adolf Hitler.

 

13.1.1.: Hitlerian Germany

Germany recovered from the Great Depression relatively rapidly once Hitler had taken power and broken adherence to monetary and fiscal orthodoxy. With the Gestapo in the background to suppress agitation for higher wages, better working conditions, or the right to strike, and with strong demand from the government for public works and military programs, unemployment fell rapidly in Germany in the 1930s. The Great Depression in Germany had been the deepest in the world save for the United States. Recovery was fastest save for Japan, and Scandinavia.

Hitler appears to have been focused on employment and weapons, not adding to industrial capacity and increasing national wealth. Build national highways, yes—but build them not by building individual city-to-city or resources-to0-industry links, but by building as much as possible first where it would be seen as many as possible. Political effectiveness and military capacity were the priorities. Political effectiveness we understand: The Nazi movement was still a minority movement, even at its high point a majority only with socialists and communist deputies excluded from voting in the Reichstag, and emergency powers granted only in the panic that followed the mysterious burning of the Reichstag. Building more political support was a priority.

But weapons? Armies? Hadn't World War I taught the Germans, and even the Nazis, and even Hitler, not to do that again?

Hitler does not seem to have what a normal person would have regarded as a good war. He enlisted—untrained—in the Bavarian Army in August 1914, after having been rejected by his Austrian homeland as unfit for military service. I October his 1st company of the 16 (List) Bavarian reserve regiment was part of nine newly-enlisted largely-untrained infantry divisions thrown into the line on an emergency basis against the British at the First battle of Ypres. The Germans call this the kindermord: the children-death, an explicit reference to the Biblical incident of the massacre of the innocent babies of Bethlehem by King Herod of Judea. 40,000 of 90,000 were killed or wounded in 20 days. Hitler's company of 250 had only 42 men with the colors by the end of the battle. Somme (1916), Fromelles (196), Arras (1917), Passchendaele (1917)—Hitler was wounded in the thigh in 1916 by a shell exploding at the dugout entrance and hospitalized for two months and then ordered to the reserves behind the line in Munich. He begged to be recalled because with his comrades at the front he could not stand Munich. He was then (temporarily) blinded and struck dumb by a British gas attack in October 1918 band spent the last 25 days of the war in the hospital. Yet these experiences did not put him off war.

Hitler was then demobilized and set adrift: he was not one of the those the General Staff wanted to keep for peacetime. But intelligence Major Karl Mayr picked him up as an undercover operative in mid-1919 and sent him to spy on socialists. One small socialist group he was sent to spy on was Anton Wexler's Germany Workers Party. Impressed with his ability to speak, Drexler invited him to join on September 1919. It became the Nazi Party five months later, when "National" and "Socialist" were added at the front of its name, "National" with Hitler's enthusiastic support and "Socialist" over his objection.

Adolf Hitler took the turn of the nineteenth century economist Thomas Robert Malthus deadly seriously: "Germany has an annual increase in population of nearly nine hundred thousand souls. The difficulty of feeding this army of new citizens must grow greater from year to year and ultimately end in catastrophe." There were four ways of avoiding catastrophe. The first three were: birth control, increased agricultural productivity, and purchasing food from abroad. The last of these left Germany dependent on British charity, the second could not work for long because of diminishing returns, and the first would reduce the fitness of the race. The fourth way was to acquire new land that Germans could farm: "It can certainly not be the intention of Heaven to give one people fifty times as much land and soil in this world as another.... We must not let political boundaries obscure for us the boundaries of internal justice.... The law of self-preservation goes into effect; and what is refused to amicable methods it is up to the fist to take... at the expense of Russia.... The new Reich must again set itself on the march along the road of the Teutonic knights of old, to obtain by the German sword sod for the German plow and daily bread for the nation..... Here fate seems desirous of giving us a sign. By handing Russia to Bolshevism, it robbed the Russian nation of that intelligentsia which... guaranteed its existence.... [The] Germanic nucleus of its upper leading strata... has been replaced by the Jew.... The giant empire in the east is ripe for collapse."

And to be ready to take advantage of that forthcoming collapse of Judeo-Bolshevist Russia, the first priority was to get Germany a strong military.

 

13.1.2: Ramsey MacDonald’s and Stanley Baldwin’s Britain

Things were different elsewhere.

In Britain the Great Depression broke the left-of-center Labour Party into two. The Labour Party had won 47 percent of the seats in the last general election, that of 1929. The Conservative Party had won 43 percent of the seats. The centrist Liberal Party had won 10 percent of the seats. The government formed after that election was Labour Party-led, but depended on liberals for its support. The Labour Party government took power with no conception of what it was going to do: its dominant frame of mine was, in Robert Skidelsky’s words, that its only option was to “govern without conviction a system it did not believe in but saw no real prospect of changing”. Prime Minister Ramsey MacDonald. Chancellor of the Exchequer Philip Snowden, and the bulk of the cabinet believed that the gold standard needed to be maintained—and that the budget needed to be balanced. Labour’s members of Parliament and its grass-roots activists were violently opposed to any reductions in unemployment benefits or in public-sector pay scales. The Liberals essential to the coalition violently opposed all tax increases, especially tariffs. A dilemma.

It remains unclear to this day why dominant opinion in the Labour Party was so opposed to—Liberal Party—plans for reflation and economic expansion. Robert Skidelsky sees the sources of Labour Party opposition to reflation as ideological. Because they were “commit[ed] to a nebulous Socialism” they could not help but believe that the plans of “’economic radicals’ such as Keynes as mere [ineffective] ‘tinkering.’” Donald Sassoon and Ross McKibbin believe that “Britain faced specific international constraints which made any serious counter-cyclical budgeting problematic”.

No, it didn’t—or at least the constraints were much more in the minds of politicians than in markets. it truly does seem to be a case of “not invented here”: The principal advocates of reflation were either Liberal intellectuals like John Maynard Keynes, or grass roots-based trade unionists like Ernest Bevin, or cabinet members on the make like future fascist Oswald Mosley. Ramsey MacDonald and the other leaders of the parliamentary Labour Party were not particularly interested in advancing the political fortunes of Liberal intellectuals, or grass roots-based trade unionists, or junior ministers who wanted over-rapid promotion above their station.

In August 1931 Ramsey MacDonald solved this dilemma by breaking his party. Together with three other Labour Party ministers, he joined with two Liberal cabinet members and four Conservative Party ministers to form a “National” government. The following month—September of 1931—large-scale capital flight from Britain began: foreign-exchange speculators believed that the gold standard in Britain was likely to fall, and they wanted to get their money out while they could.

The Bank of England could have raised interest rates high enough to stem the gold outflow: it is a balance of greed and fear, and if interest rates were high enough the greed to collect the interest now would offset the fear that abandoning the gold standard would depreciate the point later. But the Bank of England raised its short-term interest rate only to 3.5%. No higher: unemployment was at 20%, Governor of the Bank of England Montagu Norman… had a nervous breakdown, and his subordinates were not willing to act boldly, especially not since a Labour government they did not understand was in power.

On September 19 Great Britain abandoned the gold standard. As Barry Eichengreen puts it: “Realizing that there were limits on how far the Bank of England was prepared to go, and that the Bank and the Government were likely to… switch… “cheap money” once their investment in the gold standard was lost, the markets forced the issue…. precipitated the abandonment of a parity that would otherwise have remained viable.

But Britain’s abandonment of the gold standard was not followed by large-scale reflation. The spectre continued to haunt Europe. By cutting their links with the gold standard, governments gained freedom to pursue independent—and reflationary—economic policies. The Bank of England did its part, cutting back on its short-term discount rate. The National-Conservative government did not do its. In October the Conservative Party swept the general election, winning 78 percent of seats in the House of Commons. The government that followed was Conservative. Conservative Stanley Baldwin ran things, with ex-Labourite Ramsey MacDonald as an initial figurehead Prime Minister. The government cut back unemployment and other benefits and imposed regressive taxes, most notably a tariff. Monetary expansion was coupled with fiscal contraction. Britain’s recovery from the Great Depression was slow and painful.

 

13.1.3: France Clings to the Gold Standard

The franc parity established in mid-1926 was certainly an undervalued one—although in large part because the Bank of France wanted to make sure that it would not have to devalue than out of an attempt to gain strategic advantage in international trade. As a result France had a large gold inflow throughout the late 1920s. By the end of 1931 France was clearly the world’s second-leading holder of gold (behind the United States). And the increase in the Bank of France’s gold holdings did not flow through to increases in domestic credit and to domestic inflation.

Anglo-Saxon monetary historians have always tended to place a more-than-fair share of the blame on France for the structural weaknesses in international monetary affairs that laid the foundation for the Great Depression, but there is blame. For other countries France did take steps to make the Depression worse: In late 1931 the Bank of France began trying to turn all of its foreign-exchange holdings into gold, placing an additional amount of deflationary pressure on the world economy.

France’s undervalued exchange rate parity meant that, when the Great Depression began, it had little initial effect on France. For the first two years of the Great Depression, France was barely affected. The value of the Bank of France’s holdings of foreign exchange fell as other countries abandoned the gold standard and devalued their currencies. The value of French exports fell somewhat as devaluation elsewhere led to declines in its competitiveness. But these were minor annoyances for the first few years of the Depression compared to the catastrophes going on elsewhere: unemployment remained low.

In the end, however, no one could remain on the gold standard. As exports dropped, country after country devalued to try to regain some foreign demand. Increasingly, countries that had not devalued found their industries uncompetitive, their payments in deficit, and their maintenance of convertibility a source of domestic unemployment because they had to maintain higher interest rates and apply further deflation to keep foreign exchange speculators’ greed in balance with their fear. Belgium next door abandoned gold convertibility in 1935. In France it became clearer and clearer that the gold standard was not working. But French politics did not allow for a decisive change of course. A fragmented electorate produced unstable coalition governments. The French then-tradition of revolving-door governments of center and center-right politicians fighting over spoils and tarred with financial scandals prevented anyone from changing economic policy.

Throughout the early 1930s the nineteen governments and the Bank of France constantly feared that any steps toward reflation would reignite the inflation that France had experienced in the early and mid-1920s. From the crash of 1929 to 1936, the French Prime Ministers were, in succession: Briand, Tardieu, Chautemps, Tardieu again, Steeg, Laval (remember him?), Tardieu yet again, Herriot, Boncour, Daladier, Sarraut, Chautemps again, Daladier again, Doumergue, Flancin, Bouisson, Lavel (again), Sarraut (again), and finally Leon Blum, Popular Front Prime Minister who grasped the nettle, and France and the rest—the Netherlands, Switzerland—abandoned their gold parity in 1936.

Blum promised to restore pensions and public-sector wages to the levels they had held before the budget cuts of the preceding two years. Blum promised to greatly increase unemployment benefits. Blum had promised to defend the franc—no devaluation. Blum promised to balance the budget. Blum promised to cut back on military spending. Blum promised to share the work and the wealth by cutting back on working hours and supporting strikes.

Plans to cut back on military spending—in the face of Hitler’s rearmament of Germany—were never implemented. Blum’s promise to maintain the gold standard went down when his victory was the signal for a massive and unexpected wave of strikes, and then capital flight as everyone could see that a Socialist-led government was not going to deepen the Depression in order to defend the gold standard. Leon Blum’s government took several steps to the left in industrial relations: wage increases of fifteen to twenty percent, a forty-hour week, paid vacations, and mandatory arbitration of industrial disputes by the Ministry of Labor.

But Blum’s abandonment of the gold standard did not mean substantial expansion of aggregate demand: the government’s belief that the government should be trying to balance the budget led to the scaling-back of its non-military spending programs. The investing public’s—correct—belief that socialism meant inflation meant that internal price rises quickly more than offset the positive, stimulative effects of a devaluation on the money supply and on exports (particularly since the devaluations were done only under pressure of necessity).

Donald Sassoon cites Julian Jackson to the effect that France’s devaluation under the Popular Front was delayed—and thus too little, too late—because only by delay could the Popular Front avoid British and American retaliation. This seems to me to grossly misread international monetary relations during the interwar period: neither Britain nor America had altered its monetary policy in order to avoid retaliation, nor had the French government worried about potential retaliation in choosing its parity for the franc in 1926. In my judgement the delay in the Popular Front devaluation—like French socialist attempts to hold the franc a high value when the socialists took power in 1981—reflects the incompetence of party leaders who heard from their economists only what they wanted to hear, not malevolent pressure from Anglo-Saxon countries.

France entered 1938, the last year before the beginning of World War II in Europe, with its level of industrial production still less than the level attained in 1929.

 

13.1.4: Japan

In Japan fiscal orthodoxy and budget balance were abandoned in 1931. The Great Depression was not deep, and was over by 1932.

Takahashi Korekiyo was not one of the “Meiji Six”, but he was in the next rank of Japanese modernizers. Born in 1854, he was adopted by the daimyo of Sendai, studied English at the embryonic Meiji Gakuin University, and at the age of 23 took a trip to the United States to see what there was to see. Returning to Japan, he bounced around teaching English, working in the Ministries of Agriculture and Education, becoming first chief of the Bureau of Patents and so playing a key role in setting up Japan’s patent system, going bankrupt trying to start and manage a silver mine in Peru, and working in the Bank of Japan. He played a key role in raising finance for the Russo-Japnese War of 1905, and was Governor of the Bank of Japan from 1911-1913, before becoming Finance Minister for the first time in 1913.

The then-72-year-old Takahashi Korekiyo became Minister of Finance for the third time in 1931, and he had little tolerance for European models of “sound finance”. He drove policies: Japan abandoned the gold standard, devalued its currency in order to boost demand by making its export industries hyper-competitive and generating an export boom, and embarked on a massive program of armaments so that it can become a full-fledged colonial power and construct what the Japanese government called the Greater East Asia Co-Prosperity Sphere.

Industrial production in Japan in 1936 was half again as much as it had been in 1928. Good short-run economic policy. As private businesses and households were unwilling to spend as they sought to deleverage, foreign purchasers of Japanese exports and the Japanese government did take up the slack.

Bad long-run strategy: The armaments boom and the loss of civilian control over the military led to getting involved in a land war in Asia and then launching pin-prick attacks on the world's two superpowers, Britain and the United States. That was not likely to end well. It did not.

Takahashi Korekiyo was one of three senior politicians successfully assassinated on February 26, 1936, when the Imperial Way faction of the army attempted to seize power and kill their political opponents not just in the government and parliament but in the Control Faction of the army as well. along with He had not allowed the military budget to be pushed high enough to please the coup plotters.

 

13.1.5: Scandinavia

In one region of western Europe alone was the Great Depression shallow, short, and followed by a decade of strong economic growth: Scandinavia. Scandinavia’s politics during the 1930s prefigures the successful pattern of social democracy that was to come to dominate politics and economic management in the industrial core after World War II.

Consider Sweden, the heart of the Scandinavian model. Swedish socialism had been relatively strong even at the beginning of the twentieth century. And in the interwar period the Swedish socialists won enough votes to exercise power. In sharp contrast to their counterparts in Britain and France—who had no idea of what a left-wing exercise of political power would be (in large part because they bought their own propaganda that the cruelties of interwar capitalism were an inevitable part of the functioning of a market economy).

In the 1930s the Swedish socialists established housing subsidy programs, required firms to offer paid holidays and maternity benefits, set up programs to give government loans to newly-married couples short on cash, and expanded public-sector employment markedly.

All this was made possibly by a monetary policy that early cut loose from the gold standard, and pursued the goal of domestic balance through easy money and stimulated exports through the consequent low value of the real exchange rate. The countercyclical policies of the Wicksell and Wigforss-led Stockholm School were successful in rapidly eliminating the Great Depression without setting off fears of imminent hyperinflation.

As the Swedish socialists attained and successfully exercised political power in the interest of social reform, they lost their commitment to the apocalyptic doctrines of socialism: lost their belief that all private property was inherently evil, and that only a great and sudden revolutionary transformation could bring about a better society. As historian of socialism Donald Sassoon puts it, even before the start of World War II the Swedish socialists had transformed themselves into social democrats: “the welfare state was the new goal; nationalization and class conflict had been dropped; democracy was valued for itself rather than as a tactic; the national road, based on a relatively insulated national economy, had come to prevail over internationalism. The Swedish model had come into being.” And all of the industrial core was to—successfully—follow the Swedish model or some variant thereof for the generation after World War II.

 

13.2: Global Patterns

The major monetary powers of the world regularly passed up their chances to do something constructive to help the world monetary system as late as 1933, when the London Economic Conference collapsed in disagreement. The French believed that they should try to maintain the gold standard. The British, who had long since abandoned the gold standard, were unwilling to, in Eichengreen’s words, “tie their policies to those of a foreign partner [the United States] of whose intentions they were unsure.” Thus:

those [relatively few] reflationary measures that were undertaken in the 1930s were initiated unilaterally… [and] involved currency depreciation… switching demand toward [home-produced goods] and stimulating net exports. The improvement in the initiating country’s competitiveness was, of course, a deterioration in the competitiveness of its trading partners. This led commentators to disparage currency depreciation for its beggar-thy-neighbor effects. But the fact that these depreciations were beggar-thy-neighbor should not be allowed to obscure their effectiveness.

Barry Eichengreen and others have successfully demonstrated that the earlier (and the further) countries depreciated their currencies in the Great Depression, the faster (and the sooner) was their recovery. Depreciation removed the necessity of cutting government spending and raising taxes to ensure international confidence in a country’s commitment to the gold standard. Depreciation allowed countries to expand their money supplies. Depreciation allowed countries to rescue their banking systems without worrying about the consequences of bank rescue for international investor confidence.

But depreciation and reflation were not very effective as measures for curing the Great Depression because they were not fully tried. Depreciation was near-universal. Reflation was not.

Central banks did not pursue aggressive expansionary monetary policies. Fiscal authorities did not cease pursuing the mirage of a balanced budget. Instead, countries acted as though the abandonment of the gold standard was something of which they should be ashamed—and that they should keep on following, albeit in a half-hearted way—the domestic fiscal and monetary policies necessary under the gold standard. Hence the recovery of world aggregate demand from its depressed levels of the early 1930s was very slow until the very end of the decade, when the threat of war made governments realize that spending public money building weapons was more important than trying yet again to balance the budget.

 

13.3 The New Deal

13.3.1: The First New Deal

13.3.1.1: FDR at The Chicago Convention

Before the 1930s, U.S. presidential candidates and simply not appeared at the national political conventions. Candidates were supposed to remain at their homes, tending to their private affairs, until informed (a week or so after the convention) by party officials that they had been chosen. They were supposed to emulate the Roman politician Cincinnatus, who mythically remained on his small farm ploughing his crops until told that he had been elected commander-in-chief of the Roman army and dictator of Rome. The conventional pretense was that the man did not seek the office: the office sought the man.

Then-Governor of New York Roosevelt broke tradition and flew to Chicago—in part, historian Frank Leuchtenburg says, to disprove whispers that a polio victim with paralyzed legs was too frail to undertake a full-scale American presidential campaign—and spoke:

I have started out on the tasks that like ahead by breaking the absurd tradition that the candidate should remain in professed ignorance of what has happened.... You have nominated me... I know it... I am here to thank you for the honor.... [I]n so doing I broke traditions. Let it be from now on the task of our Party to break foolish traditions.... I pledge you, I pledge myself to a new deal for the American people.

 

13.3.1.2: What Was the First New Deal?

What was Roosevelt’s “New Deal”?

First, it was a unique moment in American political history. Usually American politics is the politics of near-gridlock. James Madison and company constructed the American political system so that it would be broken by design: maneuvering programs and policies through several layers of committees, two legislative houses, past the president, and into execution is very complex, and overwhelming procedural obstacles can be erected by determined opponents at almost every step along the path. Legislative majorities for one party or the other in either house of the legislature are almost always small. American is governed by increments, from the center. Between 1900 and 1950 there were times when one party had a solid majority in the House, but its majority in the Senate then was small.

The elections of the 1930s would be different. Roosevelt won 59 percent of the vote in 1932—an eighteen percentage-point margin over Herbert Hoover. Congress swung heavily Democratic in both houses. The 1930s would see Democratic political dominance in the congress to an extent never before seen since the Civil War.

For the first and only time, the president and his party had unshakable working majorities in both houses of the legislature—if Roosevelt could persuade a fractious coalition, including many southern legislators who were Democrats only because the white south remembered that it was Republican Abraham Lincoln who had freed the slaves, to come with him.

But the new majority in congress had little idea what it was to do. It was looking for direction from the newly-elected president: whatever Roosevelt sent down, the congress would probably pass.

Roosevelt had little idea what he was to do, either. But he did have a conviction that he could do something important. And he was certain that whatever Herbert Hoover had been doing was certainly not working, and needed to be changed. What Hoover was doing was raising tariffs, maintaining the gold standard, acting aggressively to balance the budget, and block attempts to start employment-promoting public works. Roosevelt was going to do the opposite. But otherwise? Roosevelt was going to do things, and if you had a half-plausible thing, you had a chance of persuading Roosevelt to try to do it.

So was born the strategy of the New Deal: stop doing everything Hoover was doing, try everything you can think of to cure the depression; drop and abandon the things that do not seem to be working; push the things that do seem to be working. Action to change America. As Roosevelt said in his inaugural address, the old way of doing things was certainly broken:

We are stricken by no plague of locusts. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated.... The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.

And action to change America was important to raise hopes, for “Let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror.”

Hence procedural and perhaps constitutional niceties should not, could not be respected in the crisis. Roosevelt announced that he would have limited patience with those who tried to block him. With respect to congress, for example, if congress failed to enact his not-yet-constructed program: “I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” 
The day after his inauguration President Roosevelt exceeded what a reasonable observer would have seen as his statutory powers by forbidding the export of gold and declared a bank holiday—a nationwide banking shutdown to freeze the then-ongoing banking crisis. The justification? The World War I-era “trading with the enemy” act. But there was no enemy. Within four days the House and Senate had convened and—the House unanimously—passed Roosevelt’s banking reform bill, arranging for the reopening of solvent banks, the reorganization of other banks, and giving Roosevelt complete control over gold movements.

The second bill Roosevelt submitted to congress—also passed immediately—was an “economy” bill, cutting federal spending and bringing the budget closer to balance. The third submission was a request for an end to Prohibition—for the repeal of the constitutional amendment banning alcohol. On March 29 Roosevelt called on congress to regulate financial markets to prevent fraud and overspeculation like that the U.S. had seen in the stock market crash.

On March 30 congress established Roosevelt’s Civilian Conservation Corps. On April 19 Roosevelt took the United States off of the gold standard. On May 12 congress passed Roosevelt’s Agricultural Adjustment Act, promising federal aid to farmers nationwide and low-interest federal credit so farmers could refinance their mortgages. (In June congress was to extend low-interest federal credit to distressed homeowners as well.) On May 18 Roosevelt signed the bill creating the Tennessee Valley Authority, the first large government-owned utility corporation in the United States.

Also on May 18, President Roosevelt submitted to congress the center-piece of his first hundred days: the National Industrial Recovery Act, or NIRA. All factions within the newly-constituted administration won something in the legislation:
 * Businesses won the ability to collude—to draft “codes of conduct” that would make it easy to maintain relatively high prices, and to “plan” to match capacity to demand. * Socialist-leaning planners won the requirement that the government—the National Recovery Administration, or NRA—approve the industry-drafted plans. * Labor won the right to collective bargaining, and the right to have minimum wages and maximum hours incorporated into the industry-level plans. * Spenders won some $3.3 billion in public works. 
Congress adjourned on June 16, 1933, one hundred days after Roosevelt had called it into special session.

Congress had committed the country to a strong “corporatist” program of joint government-industry planning, collusive regulation, and cooperation; put the entire farm sector on the federal dole indefinitely with strong regulation of commodity prices; promised to build and operate utilities; undertaken huge amounts of public works spending; established meaningful federal regulation over the financial markets; provided insurance for small depositors’ bank deposits; committed the government to mortgage relief; committed the government to unemployment relief. Congress had passed all fifteen bills submitted by Roosevelt.

Plus there were promises to lower tariffs, lower working ours, and raise wages.

 

13.3.1.3: How Did the First New Deal Work?

What did it all add up to?

The NIRA did break the back of expectations of future deflation. The creation of deposit insurance and the reform of the banking system made savers willing to trust their money to the banks again. It began the reexpansion of the money supply. Corporatism and farm subsidies did spread the pain of the Great Depression to some extent. Taking budget balance off the agenda helped. Promising unemployment and mortgage relief helped. Promising public-works spending helped. All these policy moves kept things from getting worse. They certainly made things somewhat better. And things became substantially better immediately.

Herbert Hoover and ilk ranted that Roosevelt’s policies were Bolshevist. Hoover and his ilk ranted that Roosevelt’s refusal to commit in November 1929 to continue Hoover’s policies had killed the economy over the winter, and had created a false baseline relative to which Roosevelt was falsely claiming victory. Hoover and his ilk ranted that recovery would have come of itself, and faster than under the New Deal, if only Hoover had won a second term and had a supportive congress.

But the rest of Roosevelt’s “hundred days”? It is not clear whether the balance sheet of the rest of the hundred days is positive or negative. The “economy” bill that cut spending and relief did harm. Much of financial market regulation (save deposit insurance) was simply irrelevant to the Great Depression. Farm subsidies set the American government on a path that would prove expensive and counterproductive for the next sixty years.

More important, perhaps, people relatively soon decided that they did not like the combination of “corporatist” government-business cooperation and business collusion embodied in the NRA. Consumers complained that the NRA raised prices. Workers complained that it gave them insufficient voice. Businessmen complained that the government was telling them what to do. Progressives complained that the NRA created monopoly. Spenders worried that collusion among businesses raised prices, reduced production, and increased unemployment. A committee to study the NRA headed by progressive lawyer Clarence Darrow denounced the NRA for promoting monopoly, urged a return to free competition, and then for good measure denounced competition as “savage and wolfish” and called for socialism: government nationalization of industry.

In May 1935 the Supreme Court unanimously declared the NIRA and its implementing agency, the NRA, unconstitutional. Roosevelt’s experiment with “corporatism”—which crusty Democrats like Senator Carter Glass denounced as “the utterly dangerous effort of the federal government at Washington to transplant Hitlerism to every corner of this nation” was over. It was not a success.

By the end of 1933 Roosevelt had shifted his attention to monetary matters: recovery was to be promoted by raising the prices of commodities in dollars, and the prices of commodities in dollars were to be raised by devaluing the dollar in terms of gold. By the end of January 1934 Roosevelt fixed the value of the dollar at 1/35 of a (troy) ounce of gold, fifty-nine percent of its pre-1933 gold-standard parity. But the full-fledged policy of monetary inflation and mammoth fiscal deficits that might have pulled the country out of the Great Depression quickly—that did pull Germany under Hitler out of the Great Depression quickly—was not tried. 1934 was a better economic year than 1933, 1935 was better than 1934, and 1936 was better than 1935, but not by much.

The slide in which each year was worse than the one before had been ended by the Depression. Some ground had been regained. But happy days were not here again.

 

13.3.2: The Second First New Deal

Therefore Roosevelt kept trying different things.

If business-labor-government “corporatism” did not work—and was blocked by the Republican Supreme Court—perhaps a safety net would. The most enduring and powerful accomplishment of the New Deal was to be the Social Security Act, which provided federal cash assistance for widows, orphans, children without fathers in the home, and the disabled; and which also set up a near-universal system of federally-funded old-age pensions.

If pushing up the dollar price of gold did not work well enough, perhaps strengthening the union movement would: another enduring accomplishment of the New Deal was the Wagner Act, that set down a new set of rules for labor-management conflict, strengthened the union movement, and meant that the wave of unionization in the United States in the 1930s survived for half a century (rather than being rolled back within half a generation, as had happened to previous expansions of the union movement in the United States. Massive public works an dpublic employment programs restored some self-esteem and transferred some money to households without private-sector jobs—but at the probable price of some delay in recovery, as firms and workers saw higher taxes.

Antitrust policy? The breaking-up of utility monopolies? A more progressive income tax? Finally, a hesitant embrace of deficit spending not just as an unavoidable temporary evil but as a positive good? All were tried. In the end they probably did little to cure the Great Depression in the United States. But they did turn the U.S. into a modest European-style social democracy.

And as the decade came to an end Roosevelt’s concerns shifted to the forthcoming war in Europe and to the Japanese invasion of China. Dr. New Deal was replaced by Dr. Win the War.

 

13.4: The Depression as Defining Moment

In the long run Franklin D. Roosevelt’s policies mattered not because they cured the Great Depression, but because they left behind a different—a much more social democratic—America. In sector after sector, the Great Depression encouraged and allowed to do things that brought the U.S. government much closer to the social democracies of Europe.

The most important social programs of twentieth century America all started in the 1930s. The Social Security system, federal provision of a right to old-age assistance even outside the contributory Social Security system, the framework within which labor unions operate and bargain with their employers, aid to families with dependent children—although that “right” is gone: in today’s America poor children receive government support only to the extent that their parents’ behavior is pleasing to the state—unemployment insurance, the peculiar American farm subsidy system, and our system of financial regulation are all parts of the policy reaction to the Great Depression. Perhaps most important, the Great Depression produced and solidified the idea that the government was responsible for the health of the economy.

Without the Great Depression, and the New Deal policy reaction to it, the government’s role in the United States today would be very, very different. Some historians interested in continuity trace the roots of New Deal programs back to World War I or to the progressive era: proposals for changing financial market regulations to require disclosure, the income tax, wartime agricultural price supports, support for labor in northeastern and midwestern states, and others. But progressive-era policies and proposals had by and large failed of enactment, and the progressive era had come to a close. Social experiments involving steps toward social democracy in Minnesota or Wisconsin or Massachusetts had not attracted large-scale support elsewhere. And wartime government control over the economy had been followed by postwar decontrol, and a return to “normalcy.”

It may well be that the key is that the Great Depression changed Americans’ hearts and minds about the role and place of government. The Great Depression underlined how private might fail, and how public might succeed in ameliorating if not resolving problems. Michael Bordo, Claudia Goldin, and Eugene White look at America today and see, as a result of the experience of the Great Depression, a “…general acceptance of some governmental role in public goods provision, social insurance, regulation, the completion [through information-provision or adverse selection-reduction] of various markets, the internalization of externalities, and even outright redistribution. Did the Great Depression alter the public’s view concerning the functions of government, particularly those at the national level? It would certainly appear that it did.” Capitalism had failed—at least partially failed—and it was hard to argue to workers without jobs (or who remembered that they or their parents had been without jobs), to farmers who had lost their farms (or to those who remembered that they or their parents had lost their farms) that government intervention would inevitably destroy a near-utopian near-laissez faire economy.

Thus the Great Depression called forth a substantial increase in the government share of the economy, both in the scale of programs started during the New Deal and in people’s willingness to consider other possible roles for the government. This increase was accelerated by the fact that in many cases the U.S. was simply playing catch-up to other advanced industrial countries that had been developing social insurance systems and welfare states since at least the days of Bismarck.

In government regulation of industry, agriculture, and banking; in the government’s attitude toward trade liberalization; in the government’s attitude toward labor relations; in social insurance; and in macroeconomic policy the Great Depression triggered massive changes in how Americans related to their government. It is unclear how much of the New Deal order will survive long into the twenty-first century: the shock of the Great Depression may have been an essential factor pushing the United States toward the social-democratic mold of other advanced industrial countries, and as the memory of the Great Depression dies away the U.S. may revert to earlier patterns. But it is impossible to understand the U.S. in the second half of the twentieth century without recognizing that the Great Depression truly was the nation’s defining moment.

 

13.5: Could “It” Have Happened Here?

In June 1932 the “Bonus Expeditionary Force” converged on Washington. The American Expeditionary Force [A.E.F.] of 1917-1918 was made up those American soldiers who had been sent to France in the latter stage of World War I and who had made up the margin of victory for the allies. The B.E.F. of 1932 was a group of some 20,000 massed war veterans who traveled to and demonstrated in Washington to try to convince congress to pay them at once bonuses for World War I that congress had voted to pay in 1945. The B.E.F. marchers camped in “Hoovervilles” and shantytowns by the Anacostia River and in unused government buildings on Pennsylvania Avenue. The congress rejected the B.E.F. petition, but many of the marchers remained in Washington.

Hoover panicked. He ordered the chief of the District of Columbia police to clear the veterans out of the buildings along Pennsylvania Avenue. First the police and then the army—commanded by Douglas MacArthur, armed with tanks, cavalry sabers, tear gas, and bayonets—cleared Pennsylvania Avenue, crossed the Anacostia River, and burned the shantytowns. 
Hoover’s view of the situation was that:


the march was in considerable part organized and promoted by the Communists and included a large number of hoodlums and ex-convicts determined to raise a public disturbance. They were frequently addressed by Democratic Congressmen seeking to inflame them against me for my opposition to the bonus legislation. They were given financial support by some of the publishers of the sensationalist press.... 

>When it was evident that no legislation... would be passed... [many] availed themselves of...aid [to return home], leaving behind about 5,000 mixed hoodlums, ex-convicts, Communists, and a minority of veterans in Washington... fewer than a third of them had ever served in the armies, and... [45 percent] were ex-convicts and Communists. 
 Herbert Hoover, writing his memoirs in his retirement, was a bitter man. But if he is to be trusted, he saw the unemployed veterans camped in Washington as the vanguard of a Communist Revolution.

In his memoirs Hoover tried to make it very very clear that not he, but his Treasury Secretary—Andrew Mellon—had made the decisions that led to the eviction of the marchers:

Some old buildings on Pennsylvania Avenue had been occupied by about 50 marchers. These buildings stood in the way of construction work going on as an aid to employment in Washington. On July 28th the Treasury... requested these marchers to move to other quarters. 
 Whereupon more than 1,000 of the disturbers marched from camps outside of the city armed with clubs and made an organized attack upon the police. In the melee Police Commissioner Glassford failed to organize his men. Several were surrounded... and beaten up; two policemen... fired to protect their lives and killed two marchers.... 

>In the midst of this riot the District Commissioners... asked military assistance to restore order.... General Douglas MacArthur was directed to take charge. General Eisenhower (then Colonel) was second in command. Without firing a shot or injuring a single person, they cleaned up the situation. 
>Certain of my directives to the Secretary of War, however, were not carried out. Those directions limited action to seeing to it that the disturbing factions returned to their camps outside the business district. I did not wish them driven from their camps, as I proposed that the next day we would surround the camps and determine more accurately the number of Communists and ex-convicts among the marchers. Our military officers, however, having them on the move, pushed them outside the District of Columbia...

The version that Herbert Hoover gives in his memoirs may be true, may be false. If it is true it is truly frightening.

If Hoover is correct, then commander of the army Douglas MacArthur disobeyed orders given by his civilian superiors and used military force against American citizens exercising their constitutional right to petition for the redress of grievances. Hoover and Douglas MacArthur both agreed that the B.E.F. was “a mob... animated by the essence of revolution,” and MacArthur at least believed that if there had been any further delay in disbursing the marchers “the institutions of our government would have been very severely threatened.”

An interpretation that puts less trust in Herbert Hoover’s memoirs is even more frightening: Hoover thought that in the Great Depression a large class of American citizens—B.E.F. marchers, communists, ex-convicts, “inflammatory” Democratic congressmen, the “sensationalist” press—had become Enemies of the People in Hoover’s mind.

Hoover’s search for anti-American enemies conspiring against him was not limited to impoverished ex-veterans. It included the legislative barons of the Democratic Party (who ); the legislative barons of the Republican Party (who ); and the powers-that-be on Wall Street, who had, Hoover believed, turned into “bears” conducting “bear raids” on the market to push prices down, line their own pockets further, and deepen the Great Depression. Early in 1932 Hoover summoned Wall Street’s powers-that-be to account: either they were to stop their “bear raids” on the market and restore stock prices, or he would encourage the Senate to go on an investigative witch-hunt.

We were still—even with the burning of the B.E.F. shantytowns—light-years away from Hitler’s suppression of the German Social Democratic Party, or Pinochet’s soccer-stadium massacres of Chilean leftists and supposed leftists after his coup. But Hoover’s reaction to the Bonus March is not so singular. There were additional signs of proto-fascism in the Depression-era U.S.: Huey Long, the anti-semitic radio priest Charles Coughlin, Gerald L.K. Smith. But we were still far from Mussolini’s murders of socialist legislators like Mateotti, or from French Premier Daladier’s resignation from the Prime Ministership out of fear of the French fascist mobs in the Paris streets outside.

Would the United States have stayed as far from a breakdown of democracy in the absence of Roosevelt’s New Deal? What would four years of continued deep depression with no visible signs of recovery—if Hoover had been reelected, if America had stuck to the gold standard, and if as a result America’s economic trajectory in the mid-1930s had mirrored that of France, but from a 1933 base of a much deeper depression—have brought?

---

#socialdemocracy #economichistory #slouchingtowardsutopia #highlighted #greatdepression