Drawing striking similarities between the current financial situation and that of the 1930s, Amity Shlaes gave a lecture at Hillsdale College in February 2010 detailing forgotten yet important lessons to be learned from the Great Depression. Shlaes is a senior fellow in economic history at the Council on Foreign Relations, a graduate of Yale University, a member of the Wall Street Journal editorial board, author of two bestselling books, and recipient of many prestigious awards in Economics and Journalism.
Shlaes begins by establishing the familiar narrative of the Great Depression that every American child is taught in school. A common theme Americans usually learn is that the Great Depression was somewhat of a mysterious problem which could only be solved by experts in Washington. In the 1930s, this dexterous group was known as the Brain Trust and served as Roosevelt’s key advisory board.
Secondly, Americans are told that FDR’s pursuit of white collar criminals and determination to “clean up Wall Street” helped the nation recover. Thirdly, a narrative that circulated the country was that American democracy was threatened by the potential rise of a plutocracy and that the Wagner Act (which lent federal support to labor unions) was good and necessary. Finally, Americans are told that action by government was noble; likewise, an inactive government would have been fatal. This prevailing public attitude gave FDR a prestigious amount of power. Comedian Will Rogers, 1935, humorously wrote, “if Franklin Roosevelt had burned down the capital, we would cheer and say, ‘well, at least we got a fire started anyhow!’” Under FDR, the federal government became “the bank” and, as the popular narrative states, “pulled America back to economic health.”
Shlaes, however, does not stop there. Instead she pulls back the cover on the New Deal image to reveal a lesser-known but more factually accurate analysis of the Great Depression. To give credit where credit is due, Shlaes states that the Great Depression can be considered an “economic Katrina” and that certain New Deal measures did provide lasting benefits for the economy. For instance, the Securities and Exchange Commission, the push for free trade, and the establishment of the modern mortgage format can be considered positive outcomes of the New Deal. However, overall Shlaes claims that government action impeded recovery. Both Roosevelt and Hoover (contrary to the old stereotypes that claim Hoover was passive) were overactive in their response to the economy and the government arrogance that prevailed came “at the expense of economic common sense, rule of law, and respect for property rights,” Shlaes argues.
For example, the idea that a company was “too big to fail” did not originate with George W. Bush but rather with FDR. The idea that prices needed to be raised, competition was bad, and consumer choice was inefficient were the economic principles with which Washington operated. This is important to note because these principles drove the little man right into the ditch. At a time when small businesses are the “natural drivers of recovery”, they were taken out of the driver’s seat.
Moreover, the methods by which the New Deal drove the economy were not always that scientific. For instance, prices were set by the president personally. One morning, as noted by Henry Morgenthau, FDR raised the price of gold by 21cents. Why? Because seven times three is 21 and seven and three are lucky numbers.