PAUL SOLMAN, NewsHour economics correspondent: At the Museum of American Finance on Wall Street, we sat down with Eugene White and author Amity Shlaes for a historical look at the Great Depression.
He’s an economist who generally admires FDR’s handling of the crisis. She’s the author of “The Forgotten Man,” critical of 1930s’ government intervention.
Eugene White, Amity Shlaes, welcome.
1933, President Roosevelt is about to take office, depth of the Great Depression. Where do we seem to be with respect to that moment in history?
EUGENE WHITE, economist, Rutgers University: Well, if we compare the circumstances around it, it looks very scary, because there are a lot of similarities. Those include fallen asset markets, a collapse of the stock market, real estate markets, and a credit crunch, with a lot of banks going under.
If we say, “What’s it going to look like when the new president takes office compared to when Roosevelt assumes office?” I think the circumstances are very different.
In 1933, there had been a great hesitancy from policymakers, from both the Fed and at the Treasury, to do much about it. And that was one of the things which had caused the depression to accelerate downwards.
The difference is today we’ve seen a lot of quick action by both the Fed and the Treasury to address a lot of these issues. So a lot of things which took a long time to happen afterwards, which were delayed in the 1930s, have already taken place, an easing particularly of the Fed and an increase in deficit spending.
PAUL SOLMAN: So Roosevelt takes over, and what does he do? And how does he sort of get the country back on the upswing?
AMITY SHLAES, Bloomberg: When he comes in, he does a lot of good things. One is to establish deposit insurance. We talk about that today. Another is to sort out the banks with the bank holiday. We see people doing that now.
Very quickly, he did it, and it was a rather bipartisan affair. The men said you couldn’t tell which party the people were except for you knew what side of the Treasury desk they were sitting on when they sorted out the banks.
So, began to create the SEC, the Securities and Exchange Commission, that gave clarity to markets. And, finally, of course, Roosevelt reassured through the radio, “The only thing we have to fear is fear itself,” from the Inaugural and then subsequently, as well.
Feds tinker with price mechanisms
EUGENE WHITE: I would add one thing to that list of suggestions, which were very important for confidence-building. One of those is, at the time, the U.S. was on the gold standard. And that meant that the U.S. promised to exchange $20.35 for one ounce of gold.
The problem was the U.S. was running out of gold very quickly. And what Roosevelt did was essentially allow the dollar to fall in value and to revalue gold ultimately at $35 an ounce.
That had a tremendous impact, because all of a sudden all the gold in Fort Knox and the Treasury rose in value. The Treasury was richer, so the Treasury created these gold certificates, it deposited with the Fed, and spent. And so it acted as an enormous stimulus to the economy.
AMITY SHLAES: One of the things, though, I describe in "The Forgotten Man" is Roosevelt was experimenting. They didn't really understand the gold standard even as well as it was just described, so he said, "OK, I'm going to add money to the economy. I'm going to inflate somehow. I'll set the gold price every morning at breakfast after I have my egg and my cigarette with Mr. Morgenthau in attendance, because he always says yes."
PAUL SOLMAN: He's the treasury secretary?
AMITY SHLAES: He was to become the treasury secretary. And he did set it every day, trying in sort of experimental way, "Let's drive prices up. Let's help farmers."
And he would be quite arbitrary. He'd say, "Let it go up 21 cents." And Morgenthau would say, "Why, Mr. President?" And he'd say, "Because it's seven times three, and three is a lucky number."
And Morgenthau later wrote, "If anyone knew how we did this, they would be frightened." And they were. You do see the stock market, for example, leveling off, staying at about 100 from a big rally in the spring the rest of the year.
There was an arbitrary aspect to the New Deal that was deeply destructive, and that's an important point to make, as well. Those New Yorker cartoons of people waiting it out in their living room, crying into their martini, were accurate. Capital waited for the experiment to end.
PAUL SOLMAN: The economics profession says that theoretically -- and certainly said in those days, no -- hey, prices will come down, wages will come down, markets will clear, that is, people will start buying stuff at a lower price, and the situation will reverse itself. But that didn't happen.
The burdens of borrowing
EUGENE WHITE: The problem was that here there was much larger deflation and there were some very bad imbalances in the economy, and deflation played into those, so that there was -- people were largely in debt. There was a lot of indebtedness, much higher than at previous levels, so that fall in prices was much more severe.
PAUL SOLMAN: Why would a fall in prices be difficult if you were...
EUGENE WHITE: Because if you have a loan, and you have to pay that back $100, if the price level falls, that increases the real value of that loan you have to pay back.
PAUL SOLMAN: Ah, this is like...
EUGENE WHITE: And that makes it costly.
PAUL SOLMAN: Like with houses now...
EUGENE WHITE: That's correct.
PAUL SOLMAN: If I've got a mortgage, and I'm paying, and the price -- and the value of the house is going down, then this becomes...
EUGENE WHITE: A greater burden. And it wasn't just the price of housing. It was price of all goods. So that's going down.
So anyone who had borrowed found the burden much higher. And that created not only foreclosures, but defaults on a very broad level, creating much greater distress than you'd had in previous occasions.
AMITY SHLAES: I also see the deflation as problematic. Inflation is friendly to risk-takers. America is a risk-taking economy. When you have an idea, you're young, you're trying something out, you're in debt.
Those people were punished. And that sourness we live with today in our grandparents and great-grandparents, anyone who was risky and fun, but maybe also an inventor, he lost out. The conservative people won out, the ones who saved and saved and didn't dare. So that's a cultural layover that we still have.
Learning from the Great Depression
PAUL SOLMAN: Yes, this always reminds me of the credit comes from the Latin "credere," to believe. In your book, you have a quote from the British prime minister of the 19th century, Gladstone.
AMITY SHLAES: "Credit is suspicion asleep." And that's -- suspicion was very awake in this period. It's also very awake now.
PAUL SOLMAN: Now, what lessons should we have learned from the Great Depression? And have we learned them?
AMITY SHLAES: What I discovered researching the period was that government intervention was usually problematic and made the depression worse, in Hoover's era and also in FDR's era.
So we want to be a little wary now about always asking for one more rescue package. The uncertainty of the rescue packages and their timing can do damage itself.
PAUL SOLMAN: But you're not saying -- or are you -- that government intervention in general actually was worse than if government had done nothing at all?
AMITY SHLAES: Government should have done less.
EUGENE WHITE: I would have to disagree with that interpretation. It's quite true that there were a lot of mistakes made during the Great Depression in terms of government policy, but those are primarily mistakes about intervening in specific markets, about fooling around with the pricing mechanism, affecting prices and wages.
Those were clear mistakes. But what we really learned about was how the Fed should act as a central bank, how it should act as a lender of last resort, and how to operate fiscal policy in a sensible way to counteract the effects of a stock market crash, to counteract the effects of a recession.
Those are very important lessons which are actually being used today. And it's no surprise -- and I guess, I would say, we're relatively lucky -- to have people at the Fed who have a thorough understanding of the Great Depression.
PAUL SOLMAN: Amity Shlaes, Eugene White, thank you very much.