The View From Here...
By Bob Morgan, Jr.

As the Bush Administration and the Congress attempt to stimulate the economy in the wake of the current turbulence, it is interesting and instructive to review what happened during the greatest economic crisis in the nation's history, the Depression of the 1930's.

In a new book on the era, The Forgotten Man , by Amity Shlaes (Harper Collins 2007), the author, a syndicated columnist and former member of The Wall Street Journal editorial board, offers a reinterpretation of the Depression, illustrating both the virtues and shortcomings of Franklin D. Roosevelt's New Deal program.

No one can doubt that President Roosevelt faced daunting challenges when he took office on March 4, 1933, declaring that the "only thing we have to fear, is fear itself." Unemployment was at approximately 25 percent of the labor force, the Dow Jones Industrial Average had plunged from a 1929 high of 381 to under 100 and unemployed men (and sometimes families) were often living in the streets or in makeshift shanty villages.

Many of the problems that Roosevelt faced were directly traceable to failed policies of the Roosevelt's Republican predecessor, Herbert Hoover. Fearing inflation at a time that deflation was the major economic policy, the Hoover Administration deliberately limited growth in the money supply and also raised taxes. Even worse, Hoover signed the Smoot-Hawley bill, under which "protective" tariffs reached record levels, making retaliation in foreign markets against American products inevitable.

In addition to injecting optimism and vitality to a difficult situation, Roosevelt was certainly on the mark with a number of his initiatives. He rolled back tariffs and made them reciprocal. Vastly expanded public works programs provided much needed employment. Social Security, whatever its actuarial deficiencies, was a very popular retirement program.

But as Ms. Shlaes points out, there were a number of significant downsides to the New Deal as well. Agencies like the National Recovery Administration (NRA) attempted to impose detailed government regulations on business operations. (Two poultry dealers in Brooklyn, the Schechters, were convicted of violating arcane NRA standards, but won in the United States Supreme Court.) The government seemed intent in expanding its reach, essentially nationalizing much of the power industry and looking well beyond that. The rich were taxed heavily and business leaders were castigated by the administration and sometimes subject to questionable prosecutions. (Andrew Mellon, for example, had to fend off criminal tax proceedings.) There was a feeling that the main job of the government was to cope with the Depression through subsidies and economic intervention, rather than to let market forces do their work. In Ms. Shlaes' view, the true "forgotten man" of the New Deal was the individual forced to bear the burden of the expansive new programs.

Eventually, the heavy hand of the New Deal exacted a toll by eroding the willingness of business and the wealthy to invest in the economy. In January 1938, unemployment shot back up to 17.1 percent and the Dow Jones Industrial Average fell back to 121. Eventually, it took the onset of World War II to provide the economic stimulus that ended the Depression.

What are the lessons for today? Even partisan Democrats do not expect any recurrence of the 1929 crash and its aftermath, but there are some important parallels. The Smoot-Hawley tariff was a early attack on globalization that failed miserably. Attacks on the "wealthy," through imposing high taxes or otherwise, can backfire. While the political realities are that some governmental intervention is necessary in a downturn, sometimes the cure can be worse than the disease.