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| Originally Aired: October 30, 2008 |
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Lessons of Great Depression Apply to Current Meltdown |
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stock market crash of 1929 offers parallels to the spiraling financial
crisis of the 21st century, giving insight to measures that can help
correct the collapse. Paul Solman talks to two authors on the Great
Depression who assess the government's role and analyze policy choices.
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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. |
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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. |
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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. |
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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. |
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