Monday, July 15, 2013

Book Review (#14 of 2013) The Forgotten Man by Amity Shlaes

The Forgotten Man The narrative of FDR's New Deal as I learned it in AP U.S. History goes like this:
After the stock market crash of 1929 and ensuing economic collapse conservative President Herbert Hoover refused to do any fiscal policy to help remedy the situation and the gold standard kept the economy from growing. The Smoot-Hawley tariff passed, making things much worse. FDR's New Deal was successful in putting people to work while expanding government and even though the retrograde conservative Supreme Court tried to block him, FDR won on the major issues. But even with the New Deal, the U.S. couldn't reach full employment until World War II. But is that really accurate?

Shlaes' book painstakingly lays out a timeline from the 1920s to 1940 that examines the individuals, culture, legalities, and politics of the New Deal and its effect on American life and the economy that examines the above. She looks at the New Deal through the academic articles published at the time, newspaper, magazines, court transcripts, radio shows, diaries, biographies, and other sources that remind us what Americans were thinking and arguing at the time.There's a lot of forgotten history, including the important Schechter case, and newly discovered history since the fall of the USSR

The title of "The Forgotten Man" comes from this essay by William Graham Sumner written in 1883. Suppose persons A and B see person X in need. They agree to draft legislation to help person X, but never consider person C, who must also be taxed to pay for that legislation. Person C is the "Forgotten Man." But FDR's speechwriters used "Forgotten Man" to describe Person X, instead. That contrast is the heart of the political battle in the 1930s.

There were three major problems that turned an ordinary recession into the Great Depression (these are my list in order, taking what I already knew with what Shlaes provides):
1. Tight money. But it wasn't the gold standard that was the problem. In the late '20s and early '30s, the U.S. was running trade surpluses and gold was flowing into the U.S. Under the rules of the gold standard, the Fed should have been printing much more money. But, it chose to sterilize the printing by simultaneously selling bonds, keeping the money supply from growing. Milton Friedman explained this pretty well (with a cartoon) in this video. The Fed also punished banks that were not federally chartered, having different rules of lending for state and federally-chartered banks. Sound state-chartered banks facing runs were not helped, and thus they collapsed. When Bank of United States collapsed (see Friedman video above) the Fed didn't act aggressively to end ensuing runs. The Fed had a fear of inflation, and that was shared by both Hoover and Roosevelt. It's often forgotten that in the 1932 campaign FDR repeatedly blamed Hoover for creating too much inflation a charge that was just as absurd then as now. (FDR later implemented various methods in attempts to increase inflation. Whether his campaign was disingenuous or he had an actual change of heart after office isn't addressed by Shlaes.)

So, banks and industry were starved of needed cash and deflation set in. This would continue to be a problem throughout the Depression, and wouldn't change until FDR removed the U.S. from the gold standard and the Fed printed money to help pay for World War 2.

2. Smoot-Hawley Tariff Act of 1930 (read the entire link). Republicans are to blame for this, particularly Hoover who was literally begged by businessmen, friends, and donors to veto the bill. Scott Sumner read every NY Times in this period and concluded that the stock market's decline wasn't irrational, it was in response to what everyone knew would happen if the bill became law. Foreign nations all condemned the law and retaliated, driving up the price of doing business for everyone. There's a reason why Bretton Woods had a focus on increasing trade after WWII and why we have had GATT and the WTO. More trade > less trade--it's a proven fact. Things wouldn't have been as bad if money weren't tight (see #1) but those failures of federal government made a perfect storm.

3. The Dust Bowl. (This aspect is touched on the least in the book.) Famine and major crop failures are a big problem when banks are starved for cash and failing. There is nothing the Fed or the federal government can do when poor agricultural practice hits the proverbial fan other than offer relief and support better practices next time. With #1 and #2, this is a perfect storm.

FDR eventually took the U.S. off the gold standard, but monetary policy was still very poor in the 1930s. I don't blame Presidents for poor monetary policy, though. He also worked to slowly undo the effects of Smoot-Hawley, and the data seem to indicate that this helped business expansion.

Besides #1, however, the New Deal is what maintained the Great Depression and kept unemployment from falling. Shlaes' bias in devoting much of the book to this subject has irked the ire of Progressives, but an honest look at the facts she puts out leaves it hard to question her conclusion.

Herbert Hoover had been in favor of fiscal stimulus-- he was a career engineer who explored ways government could help engineer full employment. When recession hit, he ordered state governors (including FDR) not to cease any projects and to spend as much as they could. This footnote gets forgotten in history, FDR blasted Hoover for not spending "enough" but also for running budget deficits-- the ironic tension is evident in the book.

FDR was the caricature that modern-day Republicans make of Obama today. His policies and campaign statements were often contradictory and hard to reconcile. And FDR had actually proclaimed "war on business," which he conducted vigorously: 
Imagine a world where the federal government starts prosecuting tailors for how they produce certain clothes. Where it's illegal to charge a different price for a clothes iron than what the government says, and illegal to let your customers choose which hen or puppy he wants-- he has to take what he's given. Sounds like Socialism, but that that was FDR's unconstitutional NRA. Forgotten in modern history are things like the important Schecter case, where the Roosevelt administration condemned some Jewish rabbis as "immoral" for butchering chickens to meet with kosher standards and allowing their customers to choose which chicken they wanted, rather than take whichever was pulled first out of the coop. 60 charges were brought against this relatively uneducated Jewish family, who was sent to jail and fined an amount they couldn't afford. This wasn't an isolated incident, multiply this over thousands of small businesses and court cases all across the U.S. Roosevelt was determined to prosecute anyone who did not obey by the rules of the massive and complicated NRA. This continued until the Supreme Court declared the NRA unconstitutional, which Roosevelt of course publicly condemned.

Equally bad, FDR began a war on "tax dodgers" that included prosecuting people for using deductions and loopholes that were perfectly legal at the time their taxes were filed. Andrew Mellon (who had been Treasury Secretary and helped write the tax laws) and Samuel Insull being two of the most famous cases (both were aquitted). Imagine being allowed a deduction for deducting the mortgage on your second home only to have the government prosecute you for taking that deduction a few years later-- that's exactly what happened under FDR, who used his fireside chats to continue to attack the wealthy and justify the court cases. (Shlaes documents how some Democrats in the 1932 campaign voiced their objections to Roosevelt's method of using class warfare as a campaign tactic.) Capital fled the U.S., no surprise.

While the federal government now employed many more people in various programs, there was still a lack of fiscal stimulus. The private sector wasn't contracting because the government was expanding, it was contracting because of the various constraints being put on it (the list is too long for this post, read the book).  FDR raised cut spending and raised taxes across the board in 1937, including imposing taxes on those who had not paid them beofre, in an effort to balance the budget. This alienated some of FDR's advisers who had argued through the 1930s that the solution to the economic problem was government expansion, not austerity. By 1938 the Administration was wondering "what went wrong?" and the Republicans began to gain a foothold again. But war was looming in the background...

Shlaes follows the lives and actions of a few people over two decades-- Herbert Hoover, FDR's brain trust, Wendell Willkie, an African-American leader in Harlem named Father Divine, and Alcoholics Anonymous founder Bill Wilson.

Several members of FDR's cabinet and "brain trust" (like Rexford Tugwell) were academics who had made a trip to Russia in the 1920s where they were given almost unlimited access to factories, collective farms, and Stalin himself. They were mostly impressed by the Soviet experiment, and this period is documented by Shlaes. When they returned to the U.S., they penned articles for up-and-coming journals like The New Republic, discussing how similar Progressive programs could be implemented in the U.S. Some New Deal programs, like the collective farm run by Tugwell under the Agriculture Adjustment Act, were designed straight out of their notes from the Russia trip. This was pretty fascinating to me. Shlaes documents how the Left, generally speaking, faced an intellectual crisis in the 1930s as Stalin consolidated power and murdered many of the Trotskyites FDR's "Brain Trust" had met with and thought highly of.

Willkie starts as a successful business man, Democrat, and Roosevelt supporter, who then has to bend to the federal government after the TVA was up and running--he was forced to sell the majority of his company to the TVA. He becomes a centrist Republican, running against Roosevelt in 1940 and becoming one of the first to articulate the overreach of the New Deal in a way that garners nationwide support and action.

Father Divine's cult provides lavish meals to the poor of New York during the height of the Depression, preaching peace and racial harmony. He champions an African-American boycott of the 1936 election after FDR refuses to move on anti-lynching legislation and increases his criticism after FDR appoints a KKK member to the Supreme Court.

Recovering alcoholic Bill Wilson co-authors his book and launches the self-help movement, which Shlaes holds as a contrast to the New Deal as a "government must help everyone" movement.

Having read some works on the Great Depression, I thought I knew more than I did. Shlaes book is very interesting and thought-provoking throughout. I highly recommend reading and discussing it. Five stars.

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