Sometimes, books create paradigm shifts in how we view history. The Forgotten Man: A New History of the Great Depression, by Amity Shlaes, is just such a book. An absorbing journey through that era, it sets the record straight on both the causes of the Great Depression and how the New Deal policies failed.
Conventional wisdom holds that the Great Depression was sparked by the 1929 stock market crash; that capitalism had to be saved from itself; that Hoover failed to do so; and that Franklin Delano Roosevelt helped us through the period with his New Deal policies.
But this narrative, as Shlaes makes clear, fails to recognize how the economy actually works since it reflexively champions government as a savior for the common man. In reality, reckless government intervention can make a bad economic situation much worse. The New Deal, in fact, is what put the “Great” in the Great Depression.
The Forgotten Man dispels many of the core myths and false assumptions relative to this period. Such as: A stock market “bubble” and crash did not cause the Great Depression, it was prompted by the Smoot-Hawley Tariff Act. President Hoover then shrunk the money supply and raised taxes, only exacerbating the economic dilemma. Hoover, who may have been a great humanitarian before becoming president, failed miserably in his economic stewardship.
But then Shlaes examines FDR and his hallowed New Deal. While she acknowledges Roosevelt’s genuine charisma, and the fact that he did make the banking system more transparent, she exposes his New Deal as a massive and unprecedented government intervention — a gross experiment that had profoundly negative consequences for the economy.
FDR’s policies were often heavy-handed and capricious, which left the markets unable to plan for the future — a vital ingredient for recovery and growth. One anecdote relates how John Maynard Keynes, the godfather of liberal economics, told Roosevelt that he should nationalize the utility companies or leave them alone, but above all that he must stop with the constant threats and meddling that only served to hamper them.
FDR was a market meddler of the most reckless sort. As Shlaes tells it, when an advisor asked Roosevelt how much the gold price should change one day, Roosevelt replied that it should rise by 21 cents. When the advisor asked why, Roosevelt said 21 was the product of 7 times 3, which are lucky numbers. The advisor later wrote in his diary, “If anyone knew how we did this, they would be frightened.” Well, the markets were indeed frightened, and stayed frightened for much of the decade. They knew there was no method to FDR’s statist madness.
The New Deal, in fact, was based on a profound distrust of the market. FDR’s National Recovery Administration actually argued, incredibly, that consumer choice would slow the recovery. No wonder the recovery was so tepid for much of the decade.
Predictably, however, modern New Deal defenders refuse to be swayed. Eric Rauchway, who reviewed The Forgotten Man for Slate, argues that unemployment fell and GNP grew during Roosevelt’s watch. Therefore, the New Deal had to be working. “Historians disagree on which part of the New Deal most encouraged economic growth,” he writes, “but at the least the New Deal did not prevent this recovery.” So, according to Rauchway, because the economy was merely not shrinking in the 1930s, the New Deal as a consequence must have been benign. Talk about faulty logic.
In truth, the zeitgeist of the 1930s was that democracy and capitalism were doomed, and that collectivism was the wave of the future. Mussolini, at the time, even made it to the cover of Forbes magazine. And while FDR’s brain trust did not share the totalitarian goals of the day’s biggest-government prototypes — Soviet communism, Italian fascism, and Nazism — they sure liked the idea of central planning. Stuart Chase, a popular economist back then, argued, “Why should Russians have all the fun?”
Collectivism was eventually rejected around the world as the 20th century progressed, for obvious reasons: It does not work economically and creates grotesque systems politically. Yet many still reflect warmly on the central-planning vehicle that was the New Deal. But such nostalgia misses the fact that democracies depend on limited government and must have well-functioning market economies. You cannot have political freedom without economic freedom, a point FDR never seemed to grasp.
Shlaes makes it abundantly evident that the Great Depression was an avoidable tragedy, which is a lesson that too many of our public officials need to learn. In Congress today there is a growing chorus for protectionism and higher taxes, policies that if enacted will lead inevitably to economic decline, more government intervention, and a further spiral downward.
The Forgotten Man will make any reader say, “Never again.”
– Jerry Bowyer is chief economist for BenchMark Financial. Glen Meakem is the founder of Meakem/Becker Venture Capital and is host of the Glen Meakem radio program.