[StBernard] FDR and the Great Deflation

[Westley Annis]

This entire article, which is historically very accurate, reminds me of an
old saying..."those who ignore history are condemned to repeat it."

John 

-----Original Message-----
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.