The wrong lessons about FDR and the New Deal

I'm halfway through a powerful book by Amity Shlaes which looks at the Great Depression -- The Forgotten Man. I recommend the book highly because it changes much of what we thought we knew about that time and how economics works. We are living through a very tough time now, and we have a president who believes in mistaken notions about what happened in the 1930s.

The author starts by describing extremely difficult economic times. She tells of a president and his backers who are out of touch with the common people; they do all the wrong things, such as raising taxes during this terrible time. What's surprising is the year which she is describing -- 1937. From her stories and shocking statistics, the reader first thinks she's describing the results of the crash of 1929. But in fact she is describing a depression within the depression that occurred five years after Franklin Roosevelt was elected. But aren't we told FDR got us out of the Great Depression?

Shlaes then describes the old, dominant view that most of us probably believe to be true about this time period. Thanks to many historians and history books, we believe that the 1920s was a time of false growth and low morals. The crash, which occurred in 1929, was an acknowledgment of the breakdown of capitalism. Dangerous inflation by speculators brought down the market. There was a belief that Washington needed to get more involved to save the financial well-being of the country. Hoover made things worse by failing to do much. Roosevelt, however, made things better by the being in charge and setting up the New Deal, which revitalize the country. According to this standard but incorrect view, we now realize that FDR's program is the best way to handle the economy in times of both crisis and stability. The New Deal also gave us powerful, dynamic leaders that led us out of the mess. FDR saved the country in peace and then in the war.

Shlaes says this view does not capture the realities of the time. Instead, the 1920s was a time of true economic gains. The crash of 1929 did not cause the depression. Instead, it was a necessary correction for a too-high stock market. In addition, she says Hoover and Roosevelt actually had much in common -- both preferred to control events and people, both underestimated the strength of the American economy, both mistrusted the stock market, both overestimated the value of government planning, both doctored the economy habitually. Roosevelt's remedies often came from socialist or fascist models abroad, which stressed collectivism.

All this is from the opening chapter of her book. I find it fascinating that the standard model of how we view the New Deal and Roosevelt is so flawed. Unfortunately, today we are drawing the wrong lessons from this time. Obama and his advisers, like FDR and his people, see the government as the savior and view free markets with great suspicion. We've seen the results of this attitude, and it hasn't been pretty. Let's hope there are enough people who know how capitalism really works to send our current administration packing.