FDR and the Great Deflation

October 4, 2008 by David R. Stokes | Filed Under American Politics, Book Review, Democratic Party, Domestic issues, Economic issues, History, Money, Political Philosophy, Presidents, Republican Party, U.S. History | Leave a Comment 

The period between late 1929 and the beginning of the 1940s is, of course, known as the Great Depression. But in a real sense, it could be called the Great Depressions. There was more than one massive downturn in all things economic during those days of deprivation.

Five years after Franklin Delano Roosevelt spoke so eloquently about “fear itself” - and then began to fulfill his promise of “experimentation” (as opposed to an actual plan), things were really no better than the day he took office. His “hundred days” of frenetic legislation gave way to years of false starts and faded hopes.

In early 1938, unemployment was at the 1931 level of 17.4 % and the Dow Industrial Average – at 121 - was still less than half of its 1929 high. The Dow would not actually return to pre-crash levels until Dwight D. Eisenhower was well into his first presidential term.

Amity Shlaes, in her fascinating book – a must read these days – The Forgotten Man: A New History of the Great Depression, gives us a snapshot of the situation half a decade into the politics, policies, and promises of the New Deal:

The country was now at an odd moment. There was a new sense of permanence about the Depression. Being poor was no longer a passing event – it was beginning to seem like a way of life.

What started as a panic in 1929 soon morphed into something more sinister, deadly, and often overlooked: deflation. As money became scarcer, prices fell. Declining prices, if allowed to continue for long, tend to lead to a dangerous downward spiral of negatives – things like falling profits, closing businesses and factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.

Deflation is the monster – the category 5 economic storm – to watch out for and guard against.

Early on during the Great Depression, housing values, though not starting the problem, became a leading indicator of the severity of the crisis. As prices moved down, homeowners found themselves with homes worth less than the mortgage amount. This led to a deflationary meltdown.

Sound familiar?

There are two knee-jerk things that both Herbert Hoover and Franklin Roosevelt did that actually ensured that the Depression would have a long run. First, Hoover stifled free trade when he, against the advice of many economists and business leaders, signed a protectionist tariff (Smoot-Hawley) bill. He ignored doomsday warnings that this “would spell economic isolation” and lead to the “most severe depression ever experienced.” Sadly, those warnings came true.

And both Hoover and Roosevelt fought the Depression by raising taxes.

Mr. Hoover gave us the Revenue Act of 1932, which burdened people already having a hard time holding on to homes and making ends meet. With deflation, dollars were worth more, so the government was taking these increasingly rare and more valuable dollars out of the hands of the people, in many cases sealing their financial doom.

Franklin Roosevelt wanted to change society through tax policy. He seldom met a tax he didn’t like. The president clearly cultivated his image as an enemy of the “great accumulation of wealth” and the protector of the “people” from corporations, utilities, and other usual suspects who become convenient rhetorical targets during times of economic crisis and confusion.

As the Great Depression lingered, Americans languished. Washington tended to do the wrong thing at the wrong time. As people watched the president, with a complicit Congress, raise taxes they wondered: “With business so hard, why make it harder?”

Conventional historical wisdom – the legend and lore of days gone by – suggests that Hoover was a “do-nothing” president who fiddled (better: fished) while the country burned. Then came Roosevelt on his white horse – a man of action (like his distant relative who also served as president). He saved the nation – and everyone lived happily ever after until he had to save us again – from the Nazis.

But, as Shlaes points out, the two men actually had much in common:

Hoover and Roosevelt were alike in several regards. Both preferred to control events and people. Both underestimated the strength of the American economy. Both doubted its ability to right itself in a storm. Hoover mistrusted the stock market. Roosevelt mistrusted it more.

Both presidents overestimated the value of government planning.

And both men doctored the economy habitually. Hoover was a constitutionalist and took pains to intervene within the rules – but his interventions were substantial. Roosevelt cared little for constitutional niceties and believed they blocked progress. His remedies were on a greater scale and often inspired by socialist or fascist models abroad.

Deflation impacted the American worker the hardest. In times of even moderate inflation wages increase (along with prices). But during a deflationary cycle, wages either remain the same, or drop, or worse - disappear entirely. It brings to mind one of the more morbid sayings from those days: “The Depression isn’t that bad if you have a job.”

The fact is that the crash of 1929 did not cause the Great Depression – at least, not right away. The precipitating force triggering the cascading crisis that gripped the world back then was deflation, something that Hoover overlooked – and Roosevelt missed completely.

So – why, then, was FDR elected four times? Well, in 1932 he was just plain better at campaigning than President Hoover – and people were upset and wanted change.

In 1940, the storm clouds of war certainly worked in Roosevelt’s favor. And by 1944, the people were not going to vote a sitting president out of office during a time of war (bearing in mind that an overwhelming number of Americans supported the war effort).

1936, though, is an enigma. Amity Shlaes suggests that FDR invented a “new kind of interest-group politics.” Many Americans became part of a movement that “demanded something from government.” Also, the initiatives developed during Roosevelt’s first term increased federal spending. For the first time in our nation’s history the national government spent more than all the states combined.

And 1936 was really the first election year where federally driven entitlements – a persistent challenge ever since – were part of the national experience. Enter the politics of the trough.

In other words, Franklin Delano Roosevelt was successful because he convinced enough people he was trying to do something for them. The record shows that he did not really do all that much, but such facts tend to fall short when countered by a compelling narrative.

“Bold, persistent, experimentation,” that’s what Mr. Roosevelt promised on day one of his presidency. One wonders if anyone could be elected today by saying, in effect, “I will keep making stuff up until something works.” But FDR was actually that good at politics.

As an example of FDR’s experimental economic savvy, one day he announced to his staff that he was considering raising the price of an ounce of gold by twenty-one cents. When someone inquired as to the rational behind that figure the president replied: “because it’s three times seven. It’s a lucky number.”

Imagine what Oliver Stone could do with Franklin D. Roosevelt if he gave it a try.

TNN Weekly Weekend Reward

September 20, 2008 by Frank Gannon | Filed Under Money, Music, Weekly Weekend Reward | Leave a Comment 

This weekend’s Weekly Reward will explore some variations on a theme very much in the news and on our minds these days.

And that theme is: Money.

The best things in life are free
But you can keep them for the birds and bees
Give me money
That’s what I want.

Your lovin gives me a thrill
But your lovin don’t pay my bills
Give me money
That’s what I want.

Money don’t get everything its true
But what it don’t get I can’t use
Give me money
Lotsa money
That’s what I want.

This 1979 video (long enough ago for the typewriter to be used, along with the toaster and the teapot, as part of the household’s percussion session) is the work of a sadly long-defunct British techno new wave band called The Flying Lizards.  At one point they produced an album of deadpan covers of rock classics,in including James Brown’s “Sex Machine“, Jimi Hendrix’ “Purple Haze” and Barrett Strong’s “Money”. It’s reminiscent of Nico and the Velvet Underground — except, of course, Nico wasn’t kidding around — and who doesn’t love Nico?

I discovered the Lizards several months ago thanks to a dreadful movie that had worked its way to the top of my long Netflix queue.  By the time Lord of War staring Nicholas Cage as the Tony Montana of international arms dealers arrived in my mail box, I had long since forgotten how I heard of it or why I wanted to see it.   But it’s an ill flick that blows no good, and at least I discovered the Lizards’ “Money” on the soundtrack, and their albums are now in heavy rotation here on the Western Shore.

The song “Money” was written by Motown founder Berry Gordy and Janie Bradford, who was the record company’s receptionist, who was in high school at the time.  It was recorded in 1959 by one of Bradford’s classmates, Barrett Strong.  (Mr. Strong would become a Motown legend and the frequent lyricist for composer Norman Whitfield, who died last week.  Mr. Strong is now recovering from a stroke, and our warmest wishes go to him.)

Here’s Mr. Strong’s Ur-version of the song:

“Money” (from 1963’s With The Beatles) was one of the rock classics recorded by the Beatles on their early albums.

Money as the true international language was appreciated by Monty Python……….

……….and by John Kander and Fred Ebb in their song “Money Makes the World Go Round” written for the score of Cabaret — the musical based on Christopher Isherwood’s Berlin stories.  The film starred Liza Minelli as Sally Bowles and Joel Gray as the creepy Emcee of the Weimar-decadent Kit Kat Klub.

 

A more modern style of Cabaret (although the costuming remained pure Weimar) was represented by Cyndi Lauper in this performance of her 1984 hit “Money Changes Everything”. One thing Mlle. Lauper gave these Parisian concertgoers was their money’s worth.

 

She said, “I’m sorry baby, I’m leaving you tonight.
I found someone new — he’s waiting in the car outside.”
“Ah honey how could you do it?
We swore each other everlasting love.”
She said, “ Well yeah I know but when
We did–there was one thing we weren’t
Really thinking of and thats money–

Money changes everything
Money, money changes everything
We think we know what were doing
That don’t mean a thing
It’s all in the past now.
Money changes everything.”

They shake your hand and they smile
And they buy you a drink.
They say, “ We’ll be your friends.
We’ll stick with you till the end.”
Ah but everybody’s only
Looking out for themselves.
And you say, “Well, who can you trust?
Ill tell you its just
Nobody else’s money–

Money changes everything
Money changes everything
We think we know what were doing
We don’t pull the strings.
It’s all in the past now.
Money changes everything.

The song, written by Tom Gray, actually has a plaintive melody underneath the mercenary lyrics.  It received a more sedate and melodic countrified treatment when Ms. Lauder revisited it twenty-two years later on her 2006 unplugged album The Body Acoustic.

I’m very partial to Donna Summer’s 1983 disco-with-a-social-conscience feminist blue collar anthem “She Works Hard For The Money”, which she co-wrote with Michael Omartian.

 

The trove of money-related tunes is almost as inexhaustible as the Fed’s coffers.  Whatever your taste, there’s music to match it.

There’s Pink Floyd’s now-classic “Money” from 1973’s The Dark Side of the Moon; and Puff Daddy’s “It’s All About the Benjamins” from his 1996 album No Way Out.  Mr. Combs coopted the street slang for $100 bills (”"Benjamins” from the Founder’s portrait on the face) and created a pop culture-wide phrase.

And who could fail to be moved by former former British Tory Party Leader William Hague’s rendition of “If I Were A Rich Man” from Fiddler On The Roof. If only Mr. Hague (who was, I believe, Shadow Foreign Secretary at the time this recording was made) had been able to transfer his manifold musical and literary talents to his putative prime ministry — how different history might have been.  For some reason, Mr. Hague appears to channel Yogi Bear as he changes  Sheldon Harnick’s lyrics —”Yubby dibby dibby dibby dibby dibby dibby dum”  — to “Ya ba daba ya ba daba daba do”.  I assume it’s some kind of British thing and therefore best not to ask too many questions.

 

 

Debt Therapy

July 22, 2008 by David R. Stokes | Filed Under Lifestyle, Money | Leave a Comment 

David Brooks has a great op-ed piece in this morning’s New York Times called The Culture of Debt. He discusses the tension between our desire to place blame during this current credit mess on predatory lenders on the one hand, and individuals making poor choices on the other. And he talks about how much our individual decisions are influence by “the patterns and norms of the world around them.”

Here are a couple of thoughts from the column:

“And now the reckoning has come. The turn in the market punishes many of those seduced by financial temptations. (Sometimes capitalism undermines the Puritan virtues, but sometimes it reinforces them.)”

And…

“After the Depression, a savings mentality set in. After the dot-com bubble, a bit of sobriety hit Silicon Valley. Now it’s the borrowers’ and lenders’ turn. As the saying goes: People don’t change when they see the light. They change when they feel the heat.”

Happy and Credulous — a Double Whammy

May 12, 2008 by Frank Gannon | Filed Under Money | Leave a Comment 

Alex J. Pollock, the AEI guru who deals with financial policy issues, has written (and very nicely) an interesting treatise on “The Human Foundations of Financial Risk”.

Mr. Pollock points out that the post-mortems conducted on financial bubbles usually focus on figuring out how the financial models that aided and abetted them turned out to be wrong or misleading. But such analyses ignore or overlook the purely human element —“the cumulative human forces of optimism, gullibility, short-term focus, genuine belief in momentum, extrapolation, of so-far-profitable speculations, group psychology, and increasing fraud”— that underpin economic activity. Such factors play their parts in the bubbles — so they must play their parts in the busts.

And it turns out that brainpower is no defense against human folly:

Although bubble behavior looks stupid in retrospect, many intelligent people get caught up in it–and later by it……Brilliant mathematical modelers and shrewd Wall Street bankers helped inflate the bubble of the early twenty-first century. Three hundred years before, among those entangled in the South Sea Bubble of 1720 was Isaac Newton, possibly the greatest genius in history. Newton sold his original investment in the South Sea Company for a 100 percent profit, but when the price continued to rise, he bought back in–and was stuck with a huge loss when the bubble turned to panic. Newton wrote in disgust, “I can calculate the motions of the heavenly bodies, but not the madness of people.”

It is both reassuring and depressing that Mr. Pollock’s bottom line is that there has neither been, nor is there likely soon to be, anything new under the sun. We can expect there to be bubbles and busts until human nature is repealed or perfected. But in the meantime at least two mistakes can be avoided. First, we can keep reminding ourselves to factor in the human element. Second, we can draw on past wisdom for present improvement.

Two paragraphs of Walter Bagehot’s great Lombard Street cannot be reread too often by financial actors and policymakers:

The mercantile community will have been unusually fortunate if during the period of rising prices it has not made great mistakes. Such a period naturally excites the sanguine and the ardent; they fancy that the prosperity they see will last always, that it is only the beginning of a greater prosperity. They altogether [and all together] over-estimate the demand. . . . They all in their degree–and the ablest and cleverest the most–work much more than they should, and trade far above their means. Every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever.

The good times of too high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while.

This was true when published in 1873, is true in 2008, and will be true in the future. Bagehot’s insights should have to be signed each year by all officers of financial firms before they sign their annual ethics statements. For, as Bagehot also pointed out, “[t]he mistakes of a sanguine manager are far more to be dreaded than the theft of a dishonest manager.”