Something to Fear

We’re hearing the D word a lot lately. Most pundits and economists say it can’t happen again. A few say it needn’t. But could it? Recent events bear scary parallels to 1929. Proposed remedies have a New Deal look to them. In 1933 Franklin Roosevelt famously said “…the only thing we have to fear is fear itself...” As it turned out the country did indeed have something else to fear. It had a new president with a virtual blank check and a lot of bad ideas. Will Rogers commented that Roosevelt could set fire to the capital and people would say at least he lit a match under somebody. He lit a lot of fires but the depression dragged on at least until 1940, when WWII finally pulled us out of it. The rest of the world might be forgiven if they preferred an even longer depression.

In this day of panicking markets we might do well to remember the role government played in that dark time, some lessons learned, and some not. To be sure Roosevelt inherited the depression. Herbert Hoover signed the protectionist Smoot Hawley Act that took things from bad to worse. A worldwide wave of retaliatory tariffs ensued with a disastrous collapse in trade. Hoover also presided over a restrictive monetary policy in deflationary times, with dollars so scarce that cities and states were reduced to issuing script as instruments of barter. But if Roosevelt didn’t cause the depression, his policies prolonged it for another eight years. Every positive move he made had unintended consequences that made matters worse. He raised farm prices by taking crop land out of production at a time when hunger was a serious concern. Land owners prospered, especially large land owners, but millions of tenant farmers and share croppers were forced off the land. Some of them starved. He put people to work with massive public works projects and raised taxes on the wealthy to pay for them. Private investment dried to a trickle. Nobody wanted to take risks if they were to absorb losses while the government confiscated profits. Unemployment soared. He brought in a brain trust. Some of its members idolized the central planning they had seen in Stalin’s Soviet Union. Roosevelt built the Tennessee Valley Authority and tried to propagate the model across the country to monopolize electric power generation. When the Supreme Court began to resist New Deal programs the president tried to stack it with friendly justices. Had he succeeded we might well have gone the way of the Russians. And so it went. Roosevelt himself was wildly popular, elected for three more terms. The depression continued through his first two.

So what have we learned? Not much it seems. People worry so we advocate brakes on international trade, forgetting what happened the last time we did that. At the first sign of trouble we pour government money into tax credits for favored industries, forgetting our history there too. We have begun to invest massive public funds directly into private banks. Other troubled industries are lining up for similar treatment. Politicians talk about windfall profits taxes and higher rates for the wealthy and we cheer them on. Our Treasury Secretary is supposedly a near genius. So were the members of Roosevelt’s brain trust. The Chairman of the Federal Reserve, a student of the Great Depression, was before Congress last week inviting them to embark on a new round of interventions reminiscent of the 1930s. His predecessor, probably the most renowned central banker in a generation, now says he was wrong to trust in free market correcting mechanisms through his decades of prosperity. Is there reason to think government will get it right this time? Or do we again have something to fear besides fear itself?