[StBernard] FDR and the Great Deflation

[Westley Annis]

FDR and the Great Deflation
by David R. Stokes

The period between late 1929 and the beginning of the 
1940s is, of course, known as the Great Depression. 
But in a real sense, it could be called the Great De-
pressions.  There was more than one massive downturn 
in all things economic during those days of deprivation.

Five years after Franklin Delano Roosevelt spoke so 
eloquently about "fear itself" - and then began to ful-
fill his promise of  "experimentation" (as opposed to 
an actual plan), things were really no better than the 
day he took office.  His "hundred days" of frenetic 
legislation gave way to years of false starts and faded 
hopes. 

In early 1938, unemployment was at the 1931 level of 
17.4 % and the Dow Industrial Average - at 121 - was 
still less than half of its 1929 high.  The Dow would 
not actually return to pre-crash levels until Dwight 
D. Eisenhower was well into his first presidential 
term. 

Amity Shlaes, in her fascinating book - a must read 
these days - The Forgotten Man: A New History of the 
Great Depression, gives us a snapshot of the situa-
tion half a decade into the politics, policies, and 
promises of the New Deal:

"The country was now at an odd moment.  There was a 
new sense of permanence about the Depression.  Being 
poor was no longer a passing event - it was beginning 
to seem like a way of life."

What started as a panic in 1929 soon morphed into 
something more sinister, deadly, and often overlooked: 
deflation.  As money became scarcer, prices fell. De-
clining prices, if allowed to continue for long, tend 
to lead to a dangerous downward spiral of negatives - 
things like falling profits, closing businesses and 
factories, shrinking employment and incomes, and in-
creasing defaults on loans by companies and individuals.

Deflation is the monster - the category 5 economic 
storm - to watch out for and guard against.

Early on during the Great Depression, housing values, 
though not starting the problem, became a leading in-
dicator of the severity of the crisis.  As prices moved 
down, homeowners found themselves with homes worth less 
than the mortgage amount.  This led to a deflationary 
meltdown. 

Sound familiar?

There are two knee-jerk things that both Herbert Hoover 
and Franklin Roosevelt did that actually ensured that 
the Depression would have a long run.  First, Hoover 
stifled free trade when he, against the advice of many 
economists and business leaders, signed a protectionist 
tariff  (Smoot-Hawley) bill.  He ignored doomsday warn-
ings that this "would spell economic isolation" and lead 
to the "most severe depression ever experienced."  Sadly, 
those warnings came true.

And both Hoover and Roosevelt fought the Depression by 
raising taxes. 

Mr. Hoover gave us the Revenue Act of 1932, which burden-
ed people already having a hard time holding on to homes 
and making ends meet.  With deflation, dollars were worth 
more, so the government was taking these increasingly 
rare and more valuable dollars out of the hands of the
people, in many cases sealing their financial doom. 

Franklin Roosevelt wanted to change society through tax 
policy.  He seldom met a tax he didn't like.  The presi-
dent clearly cultivated his image as an enemy of the 
"great accumulation of wealth" and the protector of the 
"people" from corporations, utilities, and other usual 
suspects who become convenient rhetorical targets during 
times of economic crisis and confusion. 

As the Great Depression lingered, Americans languished.  
Washington tended to do the wrong thing at the wrong 
time.  As people watched the president, with a complicit 
Congress, raise taxes they wondered: "With business so 
hard, why make it harder?"

Conventional historical wisdom - the legend and lore of 
days gone by - suggests that Hoover was a "do-nothing" 
president who fiddled (better: fished) while the country 
burned.  Then came Roosevelt on his white horse - a man 
of action (like his distant relative who also served as 
president).  He saved the nation - and everyone lived 
happily ever after until he had to save us again - from 
the Nazis.  

But, as Shlaes points out, the two men actually had much 
in common:

"Hoover and Roosevelt were alike in several regards. Both 
preferred to control events and people.  Both underesti-
mated the strength of the American economy.  Both doubted 
its ability to right itself in a storm.  Hoover mistrust-
ed the stock market.  Roosevelt mistrusted it more.

Both presidents overestimated the value of government 
planning.

And both men doctored the economy habitually.  Hoover was 
a constitutionalist and took 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."

Deflation impacted the American worker the hardest.  In 
times of even moderate inflation wages increase (along 
with prices).  But during a deflationary cycle, wages 
either remain the same, or drop, or worse - disappear 
entirely.   It brings to mind one of the more morbid say-
ings from those days: "The Depression isn't that bad if 
you have a job."

The fact is that the crash of 1929 did not cause the 
Great Depression - at least, not right away.  The prec-
ipitating force triggering the cascading crisis that 
gripped the world back then was deflation, something 
that Hoover overlooked - and Roosevelt missed completely.

So - why, then, was FDR elected four times?  Well, in 
1932 he was just plain better at campaigning than Pre-
sident Hoover - and people were upset and wanted change.  

In 1940, the storm clouds of war certainly worked in 
Roosevelt's favor.  And by 1944, the people were not 
going to vote a sitting president out of office during 
a time of war (bearing in mind that an overwhelming 
number of Americans supported the war effort).

1936, though, is an enigma.  Amity Shlaes suggests that 
FDR invented a "new kind of interest-group politics."  
Many Americans became part of a movement that "demanded 
something from government."   Also, the initiatives 
developed during Roosevelt's first term increased federal 
spending.  For the first time in our nation's history the 
national government spent more than all the states com-
bined. 

And 1936 was really the first election year where feder-
ally driven entitlements - a persistent challenge ever 
since - were part of the national experience.   Enter 
the politics of the trough.

In other words, Franklin Delano Roosevelt was successful 
because he convinced enough people he was trying to do 
something for them.  The record shows that he did not 
really do all that much, but such facts tend to fall short 
when countered by a compelling narrative.

"Bold, persistent, experimentation," that's what Mr. 
Roosevelt promised on day one of his presidency.  One 
wonders if anyone could be elected today by saying, in 
effect, "I will keep making stuff up until something 
works."  But FDR was actually that good at politics. 

As an example of FDR's experimental economic savvy, one 
day he announced to his staff that he was considering 
raising the price of an ounce of gold by twenty-one cents.  
When someone inquired as to the rational behind that 
figure the president replied: "because it's three times 
seven.  It's a lucky number." 

Imagine what Oliver Stone could do with Franklin D. 
Roosevelt if he gave it a try.