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Should the Depression Have Been So Depressing?

By Arnold Kling - April 27, 2007 12:00 AM

[In 1937] Just after Christmas, Harold Ickes gave a radio speech assailing America's wealthy, charging that sixty families who ran the nation were on strike against the rest of the country...Those families, Ickes said, were demanding that government give the country back the "suicidal license" it had had in 1929.
--Amity Shlaes, The Forgotten Man

I would have thought that 1929 should have looked pretty good to people living in the depths of the Depression. But one of the many interesting lessons of Amity Shlaes' new history of the Great Depression and Franklin Roosevelt's New Deal is that many Americans, both inside and outside the Roosevelt Administration, thought of prosperity as an aberration. Instead, they saw hard times as the new norm.

The Forgotten Man (TFM for short) is not a polemic. It is not an argument for a particular theory or economic interpretation of the Depression. Instead, the author steps back and lets the story tell itself. She has sifted through memoirs and contemporaneous accounts in order to carry the reader back into the mindset of the 1930's. She focuses on a diverse selection of protagonists from that period, including opponents of Roosevelt like Andrew Mellon and Wendell Wilkie as well as members of Roosevelt's "brain trust" like Paul Douglas and Rexford Tugwell. Note that in the context of that time, "trust" meant the same thing as cartel (as in anti-trust laws). Roosevelt was claiming that with his advisers he had cornered the market on brains. If so, then after reading TFM, my sense is that there was not much value in this particular monopoly.

I came away with three major conclusions.

1. For better or worse, much of the country saw the Depression as something akin to a natural disaster, and people accordingly lowered their expectations for their standard of living.

2. Economic ignorance among policymakers was much worse than I had realized. I was steeped in the myth that the reason the Depression was so bad was that only Keynes had the answer, and he had to overcome the resistance of "the classical economists," such as Irving Fisher. But the differences between Fisher and Keynes seem small when compared to the differences between the policymakers and both economists. In physics, it would be like watching an academic debate over the meaning of quantum mechanics while policymakers are unable to grasp the simple concept of gravity.

3. The struggle over economic policy in the 1930's was really an episode in the long, historical conflict between business participants in the market and anti-business academics. Roosevelt gave free rein to the professors, until the start of the Second World War led him to realize that he would need the tycoons to help mobilize to defeat Hitler. I suspect that one reason that Roosevelt and the New Deal come off so well in the conventional wisdom is that history books are written by professors, not by entrepreneurs.

This essay will focus on the first point, with subsequent essays to address the other two. I should stress that these are my own views, and that TFM is much less prone to making generalizations and drawing conclusions. Readers with a variety of backgrounds and predispositions can appreciate the book and learn their own lessons.

The Timeline

Each chapter of TFM begins with the date, the unemployment rate, and the value of the Dow Jones Industrial Average. Here is the entire timeline.


Jobless Rate


January 1927

3.3 pct


July 1927

3.3 pct


October 1929

5 pct


September 1931

17.4 pct


October 1933

22.9 pct


November 1933

23.2 pct


January 1934

21.2 pct


November 1934

23.2 pct


July 1935

21.3 pct


December 1936

15.3 pct


January 1937

15.1 pct


August 1937

13.5 pct


January 1938

17.4 pct


January 1940

14.6 pct


(Note: at the time, the unemployment rate was not calculated by the government. Shlaes is using estimates made subsequently. The 3.3 percent figure for 1927 is an estimated average for the entire year, not for particular months. The peak of the Dow in 1929 was 381. Also, in the mid-to-late 1930's, consumer prices were about 20 percent below their pre-Depression levels. So one might want to adjust downward the Dow in January 1927 by 20 percent--to 124--to compare it to Depression-era levels in deflation-adjusted terms.)

What the data on unemployment and stock prices show is that economic performance was dismal right through the beginning of the second World War. Whatever the New Deal accomplished, it did not restore prosperity to the levels of the late 1920's.

A False Prosperity?

Stocks were not necessarily overpriced in 1929, in the sense that had one bought the Dow at the peak and held it until today, one would have earned a nice rate of return. However, stock prices were more than double what they were two years earlier or two years hence, so one may concede that in 1929 there was a bubble.

What many people seemed to think in the 1930's, however, is that the lower unemployment rate and higher standard of living in the previous decade also represented something artificial.

TFM gives us Franklin Roosevelt at the Democratic National Convention where he was first nominated for President in 1932.

The country, he believed, had grown too fast: "beyond our natural and normal growth." The problem was that there had been "an era of selfishness." There existed "throughout the nation men and women, forgotten in the political philosophy of the last years." These people "look to us for guidance and for more equitable distribution of national wealth." This language sounded new--it was that of the pilgrims and the progressives. Roosevelt also assigned blame to Hoover for the inflation that they both wrongly believed was doing the damage...

This vision was a darker one than had prevailed in the 1920s. Where Americans...had believed in a future of plenty, Roosevelt believed in a future of scarcity.

TFM describes Roosevelt at his second inaugural, in 1937.

The country had developed a new understanding of life in the Depression. "This new understanding," Roosevelt said, "undermines the old admiration of worldly success as such."

Of all the members of the elite described in TFM, only Andrew Mellon shows optimism. Shlaes writes,

Mellon commented that "present conditions, however distressing, especially in terms of human suffering, reflect on a passing phase in our history." In the context of American progress, Mellon said, the Depression was a "bad quarter of an hour." The summary shocked not so much because it seemed so wrong, though it did...But the larger audacity in the statement was that it dared to question the premise of the New Deal--that the crisis was somehow permanent.

It was Mellon, not Roosevelt, who was out of step with the country. Describing the situation just prior to the 1936 election, TFM says,

Whereas in the old America of the 1920s the sight of so many jobless men had provoked shock and alarm, now people accepted it, telling themselves that at least things were better than before...Recovery was supplanting prosperity as the most reasonable goal.

A Political Machine

TFM shows that Roosevelt's vaunted brain trust was divided as well as misguided. Some shared an outlook that one might trace back to Jefferson and Jackson, of hostility toward Wall Street finance and concentrated economic power. They wanted to break up large businesses and create a level playing field for the common man.

Others, however, were ready to embrace bigness. This group held that a modern economy was characterized by great economies of scale. They viewed laissez-faire capitalism as "horse-and-buggy economics." They saw a future of collectivization and central planning. For this group, Italy and the Soviet Union represented successful role models.

Roosevelt turned to his populist advisers for campaign rhetoric and for tax proposals that would punish wealthy individuals and large corporations. But most of the New Deal, including the alphabet-soup agencies like the NRA and the TVA, reflected the influence of the collectivist-planners.

Overall, TFM gives the impression that Roosevelt did not much care one way or the other about the economics of his program. If he was not certain which of his advisers had the right ideas for restoring prosperity, that is understandable--none of them did.

Instead, Shlaes argues, Roosevelt used his keen political sense to select the policies that would build allegiance from farmers, organized labor, and other special interest groups. He created on a national level a version of the urban political machine.

The Popular Non-Revolution

One way that latter-day supporters of Roosevelt rationalize his policies is to say that they provided an alternative to the fascist and Communist uprisings that plagued Europe. Brad DeLong made such an argument to open our blog duel, and as I said in response, my father, who lived through the Depression, also shares that viewpoint.

TFM, however, paints a picture of an American public resistant to the call of violent revolution. Instead, it describes a number of instances of Americans acting in Toquevillian fashion, forming associations to solve problems, such as barter clubs when there was a shortage of money. Shlaes writes,

Odette Keun, a European journalist, came over to study the TVA and the American labor movement. After a long visit she made a conclusion that shocked both her, and probably her readers: "Labor in America is conservative. It is one of the most flabbergasting discoveries I have made." This conservatism...also was "due to the temper of the American workingman himself...the workingman en bloc is still no revolutionist. He still has not the fanatical hatred of the capitalist. He still has no essential feeling that the system is essentially unjust, infamous, execrable, and must be wiped off the face of the earth."

My sense is that Shlaes believes that it was American exceptionalism, not the New Deal, that kept the fires of revolution from leaping the oceans to our shores. When times get tough, Americans tend to look to one another, not to populist demagogues, for salvation.

A Natural Disaster

I would argue that another reason for the failure of most Americans to adopt revolutionary fervor was their interpretation of the Depression as a sort of natural disaster, comparable to a flood or a large fire. When a natural disaster or a war causes destruction, average living standards inevitably must fall, and much of the focus is on how the sacrifice can be shared equitably. Roosevelt treated the Depression in this fashion.

Like Roosevelt, many Americans seemed to think that the prosperity of the 1920's was false, and the Depression was just something they had to live with. To many people, Roosevelt sounded better than Hoover. But they did not blame the government or the American system for hard times. They just absorbed the blow, and coped as best they could.

Some were helped by various relief efforts of the New Deal. Many were not. The title, The Forgotten Man, refers to the non-beneficiaries, who as taxpayers and shareholders paid a price for the New Dealers' glory.

The good news is that the American people did not turn to violent revolution. The sad news is that they did not grasp the fact that America's productive capacity was completely intact, and that there should have been more food, more industrial output, and more people working.

From a contemporary perspective, I am saddened and appalled by this naive acceptance of economic catastrophe. Reading TFM made me want to go back in time, grab people by the collar, shake them, and say, "Hard times are not natural. Prosperity is what is natural." But few people were thinking that in the 1930's.

Arnold Kling is author of Learning Economics and Crisis of Abundance.


1 Comment

World view
Near the end of a 1936 movie "Mr. Deeds Goes to Town" Jimmie Stewart hands out his inherited riches to poor farmers so they can make a go of it.

That scene pulls our hearts strings even now if we don't project its consequences past the closing credits.

Old movies are great if you look in the backgrounds and at their assumptions.

The assumption in this scene seems clear: This new fangled manufacturing stuff is not "real". You need to get back to the good earth so everything will be fine. And natural. Familiar. Solid. Dependable.

At the time, their world was moving off the farm to the manufacturing plant. Small farms had been the basis of a comfortable life for quite a while before that. It's no wonder that a farm seemed so ... good.

In the last 20 years our world has moved off the factory floor to the office. Has there been no "great depression" in the last couple of decades because those who believe that we should stay with those "good jobs in manufacturing" haven't controlled the situation?

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