[Senate Hearing 111-140]
[From the U.S. Government Publishing Office]
S. Hrg. 111-140
LESSONS FROM THE NEW DEAL
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
WHAT LESSONS CAN CONGRESS LEARN FROM THE NEW DEAL THAT CAN HELP DRIVE
OUR ECONOMY TODAY
MARCH 31, 2009
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Colin McGinnis, Acting Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
Subcommittee on Economic Policy
SHERROD BROWN, Ohio, Chairman
JIM DeMINT, South Carolina, Ranking Republican Member
JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut
Chris Slevin, Staff Director
C O N T E N T S
TUESDAY, MARCH 31, 2009
Opening statement of Senator Brown............................... 1
Christina D. Romer, Chair, President's Council of Economic
Prepared statement....................................... 33
Allan M. Winkler, Professor of History, Miami University,
Oxford, Ohio............................................... 15
Prepared statement....................................... 38
James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Business/
Government Relations, Lyndon B. Johnson School of Public
Affairs, University of Texas at Austin, and Senior Scholar,
Levy Economics Institute................................... 17
Prepared statement....................................... 41
Lee E. Ohanian, Professor of Economics, and Director,
Ettinger Family Program in Macroeconomic Research.......... 19
Prepared statement....................................... 46
J. Bradford DeLong, Professor of Economics, University of
California at Berkeley..................................... 21
Prepared statement....................................... 53
LESSONS FROM THE NEW DEAL
TUESDAY, MARCH 31, 2009
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Economic Policy,
The Subcommittee met at 2:44 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Sherrod Brown (Chairman of the
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. The Subcommittee on Economic Policy will
come to order.
This is the first meeting of our Subcommittee.
Unfortunately, it is being delayed. I apologize for starting
about 10 or 12 minutes late. Dr. Romer, thank you for joining
us, and the other panel members, who I will introduce in a
There are three votes. I just cast a vote. Senator Merkley
will wait until the second vote starts, will vote, and then
come back, and then I will go back and cast another two votes,
and then come back. So we will keep this Committee going as Dr.
Romer and the second panel testify.
We are facing an economic challenge few among us have
witnessed. Unemployment in Ohio is 9.4 percent, the highest in
25 years. Several counties have rates in my State of more than
15 percent. My colleague Senator DeMint's State--Senator DeMint
is the Ranking Republican on this Subcommittee. In his State of
South Carolina, the unemployment figure is 11 percent. With all
respect to the economists in the room, these numbers do not
tell the entire story. Millions of men and women, as we know,
are struggling to make ends meet, trying to shield their
families as best they can, wrestling with the emotional
problems all too common to job loss.
We are unfortunately becoming accustomed to the refrain
``Worst since the Great Depression.'' Unemployment reached one
in every four workers 75 years ago, and economic output fell by
a quarter from 1929 to 1933. While not so severe, the policy
challenges faced by President Obama and the Congress parallel
some of those that Franklin Roosevelt confronted when he took
office in March 1933. Financial institutions are wounded and
hesitant to lend. Demand has fallen as consumers lose jobs and
see their savings diminish. Businesses are cutting workers
while scrambling for credit. We are learning to fear fear
itself. Fear of the unknown, whether it is job security or
health security or asset-backed Securities, is pervasive.
We cannot draw lessons from every aspect of the Great
Depression or from FDR's response. The one lesson we should
draw is the United States did indeed recover from the Great
Depression, and we will indeed recover from today's recession.
What lessons can Congress learn from the New Deal that can
help drive our economy today? That is the purpose of today's
hearing. The New Deal era remains historic for its ambition,
for its aid to the neediest, and for its lasting policies that
helped strengthen the economy and improve the lives of three
generations of Americans. While not all perfect, the New Deal
kept millions out of poverty. By 1940, unemployment was down to
12 percent, and real GDP by one estimate had grown 65 percent
Much of the New Deal's legacy remains with us today.
Investments in infrastructure paved the way for the most
dynamic economy the world has ever seen. The Fair Labor
Standards Act has guaranteed decent wages and working
conditions for millions of Americans, and Social Security has
provided a secure retirement for generations of our senior
And think where we would be today without the Securities
and Exchange Commission and the FDIC and the Banking Act.
Americans know that despite the troubles on Wall Street, their
savings at the bank on Main Street are secure.
Until recently, there was not much debate on whether the
New Deal helped or hurt efforts to recover. But recently, some
of my colleagues have suggested that the New Deal failed. They
argue that it was World War II spending that pulled us out of
the Great Depression. But this is a false choice, in my
opinion. Nothing I have seen or heard disputes the economic
impact of our becoming the arsenal of democracy. But this is
not the same as saying that the New Deal was harmful or did no
good. Discussion of the New Deal over the past several months
has served as a proxy debate for current economic planning and
recovery planning. It is a topic worthy of our examination
Thomas Paine many years ago wrote, ``By comparing what is
past with what is present, we frequently hit on the true
character of both, and we become wise with very little
trouble.'' Let us see if we should be so lucky today.
We are honored to have a distinguished group of witnesses
with us today. I look forward to their testimony.
We will begin. When Senator DeMint comes and Senator
Merkley comes and Senator Tester, if he can make it, they
certainly can feel free to make opening statements when that
We will start with Christina Romer. She is Chair of the
Council of Economic Advisers. She was a class of 1957 Wilson
Professor of Economics at the University of California-
Berkeley. Before teaching at Berkeley, she taught economics and
public affairs at Princeton from 1985 to 1988. She went to high
school in northeast Ohio, so she is a Buckeye at heart.
Until her nomination, she was co-director of the Program on
Monetary Economics at the National Bureau of Economic Research
and served as Vice President of the American Economic
Association, where she also was a member of the executive
committee. She is a fellow of the American Academy of Arts and
Sciences. Dr. Romer is known for her research on the causes and
recovery of the Great Depression and on the role that fiscal
and monetary policy played in the country's economic recovery.
Her most recent work, authored with her husband, David Romer,
also an economics professor, shows the impact of tax policy on
government and on economic growth.
Dr. Romer, thank you for joining us.
STATEMENT OF CHRISTINA D. ROMER, CHAIR, PRESIDENT'S COUNCIL OF
Ms. Romer. Well, thank you, Chairman Brown. Thank you for
inviting me to join you today. As you noted, in my previous
life as an economic historian at Berkeley, one of the things
that I studied was the Great Depression. And in my current
life, as Chair of the Council of Economic Advisers, I have been
on the front lines of the administration's efforts to end what
is arguably the worst recession our country has experienced
since the Great Depression. For this reason, I am delighted to
be with you today to talk about the lessons learned from the
Great Depression and President Roosevelt's New Deal and how
they have helped to inform us--and I think will continue to
help inform us--about the best way to approach dealing with
To start out, I think the first thing to say is that it is
very important to point out that the current recession, while
unquestionably severe, pales in comparison with what our
parents and grandparents experienced in the 1930s. February's
employment report showed that unemployment in the United States
has reached 8.1 percent, an obviously terrible number that
signifies a devastating tragedy for millions of American
families. But, as you noted, at its worst unemployment in the
1930s reached nearly 25 percent. Likewise, following last
month's revision of the GDP statistics, we know that real GDP
has declined about 2 percent from its peak. But between the
peak in 1929 and the trough of the great Depression in 1933,
real GDP fell over 25 percent.
Now, I don't give these comparisons to minimize the pain
that the United States economy is experiencing today but,
rather, to provide some crucial perspective. Perhaps it is the
historian and the daughter in me that finds it important to pay
tribute to just what truly horrific conditions the previous
generation of Americans endured and, again, as you pointed out,
eventually triumphed over. And it is the new policymaker in me,
I guess, that wants to be clear that we are doing all that we
can to make sure that the word ``great'' never applies to the
While what we are experiencing is less severe than the
Great Depression, there are parallels that make it a useful
point of comparison and a source for learning about policy
responses today. Most obviously, like the Great Depression,
today's downturn had its fundamental cause in the decline in
asset prices and the failure or near-failure of financial
Over the course of the early 1930s, nearly one-half of
American financial institutions went out of existence. This, in
turn, had two devastating consequences: a collapse of the money
supply, as stressed by Milton Friedman and Anna Schwartz, and a
collapse in lending, as stressed by the current Fed Chair Ben
In the current episode, modern innovations such as
derivatives led to a direct relationship between asset prices
and severe strain in financial institutions. And over the fall,
we saw credit dry up and learned just how crucial lending is to
the effective functioning of American businesses and
I think the similarity of the causes between the Depression
and today's recession means that President Obama began his
Presidency and his drive for recovery with many of the same
challenges that Franklin Roosevelt faced in 1933. Our consumers
and businesses are in no mood to spend or invest; our financial
institutions are severely strained and hesitant to lend; short-
term interest rates are effectively zero, leaving little room
for conventional monetary policy; and world demand provides
little hope for lifting the economy. Yet the United States did
recover from the Great Depression. So what lessons can modern
policymakers learn from that episode that could help them make
the recovery faster and stronger today?
In my written testimony, I discuss six lessons. In my oral
remarks, let me at least highlight three of them.
I think one crucial lesson from the 1930s is that a small
fiscal expansion only has small effects. I wrote a paper in
1992 that said fiscal policy was not the key engine of recovery
in the Great Depression. From this, some have concluded that I
do not believe fiscal policy can work today or could have
worked in the 1930s. Nothing could be farther than the truth.
My argument, in fact, paralleled E. Cary Brown's famous
conclusion that in the Great Depression, fiscal policy failed
to generate recovery ``not because it does not work, but
because it was not tried.''
The key fact is that while Roosevelt's fiscal actions
through the New Deal were a bold break from the past, they were
nevertheless small relative to the size of the problem. When
Roosevelt took office in 1933, real GDP was more than 30
percent below its normal trend level. For comparison, the U.S.
economy is currently estimated to be somewhere between 5 and 10
percent below its trend.
The emergency spending that Roosevelt did was precedent
breaking. Balanced budgets had certainly been the norm up to
that point. But it was quite small. As a share of GDP, the
deficit rose by about one-and-a-half percentage points in 1934.
One reason the rise was not larger was that there had been a
very large tax increase passed just at the end of the Hoover
administration. Another key fact is that fiscal expansion was
not sustained. The deficit as a share of GDP declined in fiscal
1935 by roughly the same amount that it had risen in 1934. And
Roosevelt also experienced the same inherently procyclical
behavior of State and local fiscal actions that President Obama
is facing. Because of balanced budget requirements, State and
local governments are forced to cut spending and raise tax
rates when economic activity declines and State tax revenues
fall. So at the same time that Roosevelt was running
unprecedented Federal deficits, State and local governments
were switching to running surpluses. The result was that the
total fiscal expansion in the 1930s was actually relatively
small. As a result, it could only have a modest direct impact
on the state of the economy.
I think this is a lesson the Obama administration has taken
to heart. The American Recovery and Reinvestment Act, passed by
Congress less than 30 days after the inauguration, is simply
the biggest and boldest countercyclical fiscal action in
American history. The nearly $800 billion of fiscal stimulus is
roughly equally divided between tax cuts, direct government
investment spending, and aid to the States and people directly
hurt by the recession. And the fiscal stimulus is close to 3
percent of GDP in each of the next 2 years. We firmly expect
this fiscal expansion to be extremely important to countering
the terrible job loss that last month's numbers show now totals
4.4 million since the recession began 14 months ago.
A second lesson that we can draw from the recovery of the
1930s I think is that financial recovery and real recovery go
together. When Roosevelt took office, his immediate actions
were largely focused on stabilizing a collapsing financial
system. He declared a national bank holiday 2 days after his
inauguration, effectively shutting every bank in the country
for a week while the books were checked. This 1930s version of
a ``stress test'' led to the permanent closure of more than 10
percent of the Nation's banks, but improved confidence in the
ones that remained. Roosevelt also temporarily suspended the
gold standard, paving the way for increases in the money
supply. And in June 1933, Congress passed legislation helping
homeowners through the Home Owners Loan Corporation.
Now, the actual rehabilitation of the financial
institutions actually, obviously, took much longer. Indeed,
much of the hard work of recapitalizing banks and dealing with
distressed homeowners and farmers was actually spread out over
1934 and 1935.
Nevertheless, the immediate actions to stabilize the
financial system had dramatic short-run effects on financial
markets. Real stock prices rose about 40 percent from March
until May 1933, commodity prices soared, and interest rate
spreads shrank. And the actions surely contributed to the
economy's rapid growth after 1933.
But I would also point out that it was only after the real
recovery was well established that the financial recovery took
firm hold. The strengthening of the real economy improved the
health of the financial system. Bank profits moved from large
and negative in 1933 to large and positive in 1935. Real stock
prices rose; business failures fell; and this virtuous cycle I
think continued as the financial recovery led to further
narrowing of interest rate spreads and increased willingness of
banks to lend.
I would say that this lesson is another one that has been
prominent in the minds of policymakers today. The
administration has from the beginning sought to create a
comprehensive financial sector recovery program. The Financial
Stabilization Plan was announced on February 10th and has been
steadily put into operation since then. It includes a program
to help stabilize house prices and save responsible homeowners
from foreclosure; a partnership with the Federal Reserve to
help restart the secondary credit market; a program to directly
increase lending to small businesses; the capital assistance
program to review the balance sheets of the largest banks and
ensure that they are adequately capitalized; and the program we
announced just last week to partner with the FDIC, the Federal
Reserve, and private investors to help move legacy or ``toxic''
assets off banks' balance sheets. This sweeping financial
rescue program is central to putting the financial system back
to work for American industry and households and should provide
the lending and stability needed for economic growth. At the
same time, the fiscal stimulus package enacted on February 17th
was designed to create jobs quickly. And in doing so, it should
lower defaults and improve balance sheets so that our financial
system can continue to strengthen.
The third lesson that I would highlight from the Great
Depression is that it is important not only to deal with the
immediate economic crisis, but to put in place reforms that
help prevent future crises. Bank runs, as you surely know, were
one of the key factors in the downturn of the 1930s. In June
1933, President Roosevelt worked with Congress to establish the
Federal Deposit Insurance Corporation. That act, together with
subsequent legislation, established the insurance of bank
deposits that we still depend on today.
The FDIC, I think, has been one of the most enduring
legacies of the Great Depression. Financial panics largely
disappeared in the 1930s and have never truly reappeared. The
academic literature certainly suggests that deposit insurance
played a crucial role in this development. One simple but
powerful piece of evidence of the importance of Federal deposit
insurance is that among the few bank runs that we have actually
seen since the Depression were ones on non-federally insured
savings and loans in Ohio and Maryland in the 1985. And a
striking feature of the current crisis has been the continued
faith of the American people in the safety of their bank
deposits. I think in this way, the reforms instituted in
response to the Great Depression almost surely helped prevent
the current crisis from reaching Great Depression proportions.
I think the importance of putting in place more fundamental
reforms is another lesson of the New Deal that the
administration is following. The current crisis has revealed
weaknesses in the regulatory framework. Most obviously, we have
discovered that financial institutions have evolved in ways
that left systemically important institutions inadequately
capitalized and monitored. We have also found that the
government lacks the tools necessary to resolve complex
financial institutions that have become insolvent in a way that
protects both the financial system and American taxpayers. We
look forward to working with Congress to remedy these and other
regulatory shortfalls. By doing so, we can make the U.S.
economy more stable and secure for the next generation.
The very final lesson that I want to draw from the 1930s is
perhaps the most crucial and it is one that Senator Brown
already touched on, and that is that a key feature of the Great
Depression is that it did eventually end. Despite the
devastating loss of wealth, the chaos in our financial markets,
and a loss of confidence so great that it nearly destroyed
Americans' fundamental faith in capitalism, the economy came
back. Indeed, the growth between 1933 and 1937 was the highest
we have ever experienced outside of wartime.
This fact should give Americans hope. We are starting from
a position far stronger than our parents and grandparents were
in back in 1933. And the policy response has been fast, bold,
and well conceived. If we continue to heed the lessons of the
Great Depression, there is every reason to believe that we will
weather this trial and come through to the other side even
stronger than before.
Senator Brown. Thank you for a very conclusive and
comprehensive assessment and observation of that period.
Dr. Romer, you just mentioned that we had that high growth
rate from 1933 to 1937. Critics of the New Deal will say that
the recession within the Depression or the second big downturn
in that decade that happened in 1937 illustrates that
Roosevelt's New Deal did not work, that unemployment went back
up--not as high as it was at the beginning of the decade.
What in your mind--answer those critics, if you will, and
specifically what in your mind caused that downturn in 1937-38
that led the critics to make those observations?
Ms. Romer. You actually bring up two very important points.
One is when people talk about the Depression being slow or
certainly the recovery from the Depression being slow, I think
that is really a mischaracterization of the facts. And
precisely as you pointed out, in the mid-1930s, we just grew
incredibly quickly. We were growing. Real GDP went up at about
10 percent a year for those 3 years, sort of the first 3 years
of the recovery. But part of what happened is then we do
obviously have that second recession in 1938.
In my mind, it is caused by two fundamental things. I think
here I listened very strongly to Milton Friedman and Anna
Schwartz, who say it was a monetary contraction. And, actually,
in my written testimony, it is one of the other lessons that I
draw from the New Deal, is the importance of not cutting back
on stimulus too soon, because I think one of the things that
happened in 1937 is the Federal Reserve got nervous. They said,
you know, they were worried that should they need to tighten
the economy, there were so many excess reserves in the economy,
they thought, well, gee, maybe we cannot do this. So what they
did was to just raise reserve requirements, thinking it would
not have any effect, they had just changed excess reserves to
required reserves. What they did not count on was that banks
were nervous. They had just been through the Great Depression
and all of these banking panics, and so they scrambled to get
more excess reserves over the new higher level.
And so we absolutely have a pretty severe monetary
contraction in 1937 that pushes up interest rates, reduces
lending, and I think that is an important part of it.
The other is you do get some fiscal contraction as well. In
1936, we had a big veterans bonus, so kind of a big sort of
chunk of government spending that then disappeared in 1937.
Nineteen-thirty-seven is when we first collect Social Security
taxes, and so we do have a certain fiscal contraction, and I
think that also played a role.
But I think neither of those would you say are in any way
an indictment of the New Deal policies. I think they are an
indictment of using those tools of monetary and fiscal policy
not very well and sort of inadvertently doing monetary and
Senator Brown. Some critics will argue then that the
recession of 1937-38 was in part a response to wage hikes;
minimum wage had been implemented; a 40-hour work week, I
believe, was beginning; that there was collective bargaining;
that wages were going up; that some critics will say that that
was a distortion, sort of an artificial distortion of the
Weigh in on that, if you would. In other words, do higher
wages in effect cause less employment and, therefore, a
contraction in the economy?
Ms. Romer. So, you know, I think that was a story that was
out there. The way it is usually described was that firms, in
anticipation, say, of labor strife that might be coming because
of the new collective bargaining rules, sort of produced a lot
in 1936 and 1937, kind of got a big run-up in inventories, and
then cut back in 1938.
My own read of the evidence is that there is just not much
sign that that was really the key thing going on, and I guess
here I would invoke Milton Friedman. If there was ever a person
that would tend to think that unionization or high wages or
things might cause a recession, he would be one of them. And
yet he is probably the--he and Anna Schwartz are the strongest
proponents of the monetary explanation for what happened in
1937 and 1938.
So I certainly think that the evidence is much more
strongly on the side of--that it was an aggregate demand
contraction that was the main reason for that downturn.
Senator Brown. And fiscal stimulus, my understanding--you
touched on this--is Roosevelt in 1937, 1938, pulled back on--
well, one, with the tax increase in Social Security. That was
the only tax increase?
Ms. Romer. That was----
Senator Brown. That was relatively significant in that
Ms. Romer. It was not very large. I think, again, if you
are doing the weighing of these things, I would say the
monetary contraction was more important. I would say the tax
increase at the time--I mean, it was significant, but it was
not large. I do not think it was certainly large enough to
cause the kind of downturn we saw by any means.
Senator Brown. But he also pulled back on government
Ms. Romer. Absolutely. And, again, it is almost a little
bit of an accidental thing in the sense that we had had a big
surge in expenditures in 1936. There was a veterans bonus, a
bonus to World War I veterans.
Senator Brown. But not in 1937-38. That did not----
Ms. Romer. Right, so it was 1936 and then it disappeared in
1937. So if you look at the path of government spending, it
goes way up and then back down.
Senator Brown. As an economist, teach me something from
sort of a bird's-eye view here. Many of my colleagues are
concerned about the level of spending and borrowing. That same
group was not all that concerned a year or two ago with
spending and borrowing, but that is more of a political point
that I do not want to get into.
Can we do this through the--well, why can't we do this
through the Federal Reserve rather than fiscal stimulus? Talk
me through what the difference is and why we need both in the
economy rather than just the Fed--rather than pursuing monetary
Ms. Romer. Gladly. So I would have said, you know, sort of
again if you look at my sort of life's research, a big part of
it has been pointing out that monetary policy is very
effective. And I think if you had asked me 5 years ago, in
response to a recession, sort of what is the main tool that one
uses, it is monetary policy. And the usual reason for that is
to say that it, one, is very effective; and, second, it is
something that can be changed pretty quickly. And certainly the
usual view, if you do sort of the history of post-war policy,
you know, the record on using fiscal policy well had not been
very strong, that, you know, the times we had tried to do
fiscal expansion, we often did it too late, and so it tended to
come after the recession was already over and things like that.
So that is all kind of a way of background of saying I
think this time is different. The first is, you know, a typical
post-war recession, quite honestly, was caused by monetary
policy. A typical recession is the Fed would have tightened
because they were concerned about inflation. The economy would
go into a recession, and then it was pretty obvious how you got
out of it. They just loosened again.
What was very striking in this recession is very different
in that, you know, the interest rates were already quite low
when the trouble in our financial markets, the collapse of
housing prices started. And so sort of the amount of room that
we had to expand monetary policy, bring interest rates down,
was not particularly large.
The other thing to say is we used the tools that we had.
Very quickly, the Federal Reserve did do a big monetary
expansion, and I would certainly say the Fed has been quite
creative in trying to restart lending markets and trying to do
expansionary--their usual expansionary policy. The problem that
we faced is it was not enough, and I think that is the key
reason why we need the second tool now, why we need fiscal
The other thing--and here I mainly want to compliment
Congress in the sense that I think this really is a triumph
that we passed such a big, bold fiscal stimulus act at the time
before we even hit bottom of the recession. That is very
unusual to get our act together and get the aid that the
economy needed through the fiscal side as quickly as we did.
But I think the main answer to your question is: In a recession
this big, you needed both of them.
Senator Brown. Thank you, Dr. Romer.
Senator Merkley [presiding]. Thank you very much, Doctor,
for coming to testify. We appreciate the work you are doing. I
am just going to continue with some of the questions that folks
were interested in.
When you were studying writing on the New Deal in the
1990s, did you ever imagine you might someday put that
knowledge to use outside an academic setting?
Ms. Romer. I have to tell you I didn't, and when I think
back of the number of times that I would tell my introductory
economics classes that, well, the one thing I was sure of was
we would never face bank runs again, and so the first time that
I saw people lining up outside a bank out in California last
summer, it just--or last fall, I guess, I never dreamt that
those kind of things would ever happen again.
So I do want to come back to the point that even though I
think the research is quite useful now, I do want to make it
clear conditions are quite different, that as bad as things
are, what our parents and grandparents went through were
certainly much worse. And I like to think it is because we have
learned a great deal. I do think that we have spent the last 6
years getting a much better handle on the economy.
I would say that the shocks the economy has faced in this
downturn are probably almost as big as what we saw in the Great
Depression, the disruptions in our financial institutions, the
collapse of asset prices. All of those have been just huge
macroeconomic shocks, and I think the very fact that we are
where we are today and not somewhere much worse is at some
level because we have had a much better policy response.
Senator Merkley. Thank you. Your predecessor as Chair under
President Bush, now Fed Chairman Ben Bernanke, endorsed fiscal
action a little over a year ago. This suggests a pretty broad
consensus among economists. As he put it, quote, ``Fiscal
monetary stimulus may provide broader support for the economy
than monetary policy alone.''
Is there a fairly broad consensus among economists for the
need for such stimulus?
Ms. Romer. I feel there is. I mean, certainly, there is
always a certain amount of disagreement among economists, but I
think one of the things that has been striking in this downturn
is the degree to which there has been a professional consensus.
I know back in December when we were thinking about
designing a fiscal stimulus and how big it should be, one of
the jobs that I took on was just calling a wide range of
economists from both ends of the ideological spectrum and there
was just, you know, you got a few people that would say, no, I
don't think we need any, and there were a number that would
say, I think it should all be in the form of tax cuts. What was
really striking is the consensus that we needed something, that
it needed to be big, that we had tried monetary policy, we had
done a lot there, but we needed more. So I do think there is a
strong professional consensus.
Senator Merkley. You know, one of the things that I am
interested in getting your perspective on is that we not only
have substantial national governmental debt, but we also have
sizable consumer debt. When those are taken together, consumer
and government debt, is there any parallel to the Great
Depression in terms of percent of GDP, or are we way beyond the
level of debt that was carried even at the height of the Great
Ms. Romer. I would say we--I mean, I should check the
numbers, but I would say we certainly are higher. I mean, one
of the things that is important to realize is right before the
Depression started, very much the norm had been a balanced
budget and so the debt-to-GDP ratio, we had made a lot of
progress coming out of World War I and had retired a lot of it.
Likewise, in the 1920s, there had been sort of the
beginning of the consumer durables revolution. People started
to buy cars and appliances and things. But even so, consumers
were certainly much less in debt than now. So that certainly, I
think, is a change between the 1930s and today.
Senator Merkley. I saw a chart in a magazine article a year
or so ago that seemed a little surreal to me. I believe that
what it showed, and it was combining consumer debt and
governmental debt, was that during the height of the Great
Depression, the debt-to-GDP, the combined debt, reached about
two-and-three-quarters times the GDP, not so much because the
debt surged in the Depression, but because of the economy
tanking, and then the chart showed this combined debt now, and
now being about a year ago, had exceeded that height at the
Great Depression and was still headed straight up.
Those numbers are not--I don't normally hear those numbers
in the debate because we don't normally talk about the
combination of consumer and governmental debt, but let us say
this is--is it in the ballpark that we may be well over three
times the GDP with the combination, and if so, how does that
really constrain our ability to recover in this economic
Ms. Romer. I think on the numbers, I just have to go back
and check them. It is not one that I have on the top of my
I think the place where economists are thinking certainly
about the consumer debt is both consumer debt--I guess the
other thing we talk about a lot is consumers have seen their
wealth decline. At the same time they add a certain amount of
debt, they have also seen their 401(k)s and the value of their
house go down, and so how that kind of change in the household
balance sheet is going to affect what they do going forward, I
think is an important question.
Certainly, I think most economists predict that we are
going to see consumers having a higher savings rate. We are
already seeing that, and my prediction is that is what is going
to be true as we go forward, even once we are out of this
particular downturn. And so that is going to be an adjustment
for the American economy. To the degree that we have been sort
of living on a consumer that was going into debt and sort of
spending beyond their means, it is going to mean a
readjustment, and I think it could be a very healthy
readjustment in the sense that what would normally happen in an
economy, if consumers start to save more, that tends to bring
down interest rates in the economy. That tends to encourage
investment. And certainly from an economic perspective, I think
that would be good for the economy and would put us on a path
to a more sustainable future and a higher growth future.
Senator Merkley. You know, so much of our effort now
involves generating dollars through the Fed as well as
appropriated response in terms of creating a stimulus, do we
have a very good way of judging the tipping point at which the
international community becomes concerned about the long-term
health of the dollar?
Ms. Romer. I think what I would say is we probably don't
have a good way of judging it other than to say, I am virtually
certain we are not anywhere close to being at a tipping point.
So I think what we have seen in this particular downturn,
especially with the uproar in financial markets, what I have
found very striking is the degree to which in times of crisis
everybody wants to invest in the United States. We have seen a
lot of our interest rates, in fact, come down because
foreigners want to hold American assets and the dollar.
So you raise, I think, a legitimate point. You know, the
way I think about it is sort of going forward, we do know that
our budget deficit is very large, mainly because, one, we
inherited a large deficit. The economy is in a terrible way and
we are having to spend a lot to get out of this.
But it is certainly something that I don't feel can or
should be sustained, that it is something--you know, the
President has certainly said he wants to get this down, is
committed to bringing it down, and I think that is ultimately
going to be important for everyone maintaining faith in the
U.S. Government, that we need to show signs that we are going
to get this deficit under control, make real progress, and I
think that is something that the world will be looking at.
Senator Merkley. You know, within the stimulus plan, there
are three major emphases in terms of restructuring our economy,
and so I wanted to ask you about each of those, starting first
with the energy side. And I apologize if I am repeating any
questions that the Chair had before he left. But specifically,
the argument that we need to insulate ourselves from foreign
energy price spikes such as we had last year driving $4 a
gallon gas and just kind of the vulnerability, perhaps the
national security vulnerability as well as economic security
issue. How important is it to use this opportunity to
restructure our energy consumption, and are the strategies that
are in the stimulus the right ways to do that?
Ms. Romer. I think you raise a great point. I mean, there
are a couple of things. One is your mention of the stimulus
package. One of the things that the President, working with
Congress, felt was important is that if we need to be spending
money to get the economy out of recession, we ought to spend it
wisely, and so one of the things that I think we all tried to
do is to do things that we thought would benefit the American
economy going forward, and I think you are absolutely right.
Anything that helps to wean us off foreign oil, we think is
going to be good for the economy.
We certainly think that in the Recovery Act, we had various
incentives for alternative fuels, incentives for increased
efficiency, like weatherization, Federal buildings, low-income
housing. I think all of that are incredibly important and
things that we probably should be doing more as we go forward,
and that has certainly been one of the key areas that the
President has identified, that even as tough as times are now,
energy independence, weaning us off foreign oil, dealing with
the long-run effects of climate change, are things that he very
much thinks warrant important investments.
Senator Merkley. So one side of the energy puzzle is
certainly using less energy, using less oil. Another side is
putting the United States in a position of manufacturing
products, both intellectual property products--patents, et
cetera--and actual physical products--wind turbines, solar
panels, et cetera--to sell to the world. How important is
positioning ourselves in terms of the manufacturing side of the
Ms. Romer. Certainly, the President has identified that as
sort of the alternative energies and the manufacturing that
goes with wind turbines and solar panels as a win-win, right,
so it is something that strengthens our economy, creates jobs
here, and makes us be more efficient and able to use the kinds
of energy that we have here that are renewable and aren't
coming from abroad.
Senator Merkley. I heard a statistic today, I am not sure
if this is accurate or not, that for every month of the last 8
years, for every single month, we have lost manufacturing jobs
in this country. Is that accurate, every single month?
Ms. Romer. I would have to check every single month. I
certainly know it has actually been very striking. The Council
of Economic Advisors--this has been an issue that we are very
interested in. It is certainly a priority for the President.
And so we have been doing some work looking at the decline in
manufacturing. It is very striking. You go back to, say, the
1982 recession. What has really been true after sort of each
recession is you never quite come back to where you were
before, and that we do see this long-run decline in
So part of what we are experiencing now in Michigan, Ohio,
Indiana, where we see not only the effects of the very severe
recession that we are in, but this long-run decline in the
manufacturing base, especially sort of the Midwestern heavy
industrial manufacturing base, is absolutely a trend that is
Senator Merkley. Does the preservation and expansion of the
middle class in our country depend upon the expansion of
manufacturing, or are there alternative strategies to have a
large percentage of Americans in the middle class?
Ms. Romer. That is again a terrific question. What I would
say, there is a sense that somehow there is something special
about manufacturing, and for an economist, I think that is--we
have less trouble, maybe, than most in saying, even if you
can't see it, a service like providing a mammogram for someone,
well, that is as much a good thing as if you make a motor or
So I wouldn't draw that kind of a distinction. But what has
been true is that manufacturing jobs tended to be good, high-
wage kinds of jobs, and so certainly one way to sort of
maintain the middle class or grow the middle class is to grow
that sector of the economy. If that doesn't work, what you
absolutely need to do is to create other kinds of jobs that
have those same characteristics. So whether they are, you know,
services that require a certain amount of training, but
whatever is the case, you certainly need to be creating the
good jobs at good wages. That is what is fundamentally good for
making a big, strong middle class.
Senator Merkley. Let me turn to the area of education. I
have often said that the success of our economy a generation
from now depends on our investment in education today, but that
is--I am a layman. I am not an economist. Do we see a
correlation as we look at economies around the world in terms
of their investment in education paying off in terms of the
strength of their economy years down the road? And what can we
take from our observation of statistics around the world,
performance of economies around the world, to help guide us in
terms of our investment in education?
Ms. Romer. This may be a very good question to ask Brad
DeLong when he is on the next panel. Certainly, when you do the
growth accounting, I think, across countries, what we call
human capital formation, where there is mainly education, I
think the evidence is that it is quite important to the
development of countries and to their ultimate economic
Certainly the empirical literature on sort of the returns
to education and how important it is, it is inherently hard
precisely because rich countries tend to invest more in
education and so disentangling the causation. But certainly my
own read of the literature is that there is a strong
correlation and I think the correlation runs from investments
in education to indeed make you a stronger economy, able to
produce more, able to command higher wages.
Senator Merkley. Are there kind of distinctions between the
types of investment in education that we should be aware of as
we think about this issue of strengthening our economy, getting
the most bang for the buck for our investment in education?
Ms. Romer. Certainly, I think if you had my colleague on
the Council of Economic Advisors Cecilia Rouse, I think one of
the things she would tell you is junior colleges are one of the
places where you get some of the highest returns, sort of
those--those, I think, have certainly shown to be a very good
investment in terms of both how much costs to provide that
education and the kind of jobs that you are able to get with an
In general, I think all types of education are good and
certainly more is better. I think there is a certain amount of
evidence that job training is very good.
Senator Merkley. Doctor, thank you. I have just one more
question for you and that is turning to the health care side.
We invest about a sixth of our economy, about 18 percent, a
little more than a sixth, in health care, and yet Europe and
Canada, many other modern manufacturing economies are spending
a great deal less. Is our health care structure a competitive
disadvantage and do we have to overhaul health care, not only
for the quality of life of our citizens, but in order to be
Ms. Romer. I have to say it is. I think that is exactly
why, again, even as tough as economic conditions are now, the
President has identified reforming our health care system as
just a priority that can't wait. I think he would have exactly
the point of view that you just mentioned, that this fact that
the cost of health care is rising so rapidly in the United
States, faster than GDP and other costs, has been certainly
something that is bankrupting businesses. It is hard on
households. And it is ultimately very hard on the Federal
Government. So I think it is crucial.
Senator Merkley. Thank you very much, Doctor. It is my turn
to dash to the floor to vote. Thank you.
Ms. Romer. Thank you.
Senator Brown [presiding]. Thank you, Senator Merkley, and
Dr. Romer, thank you for your time. Thank you for your
testimony, and especially thank you for your public service.
Ms. Romer. It has been lovely to be here. Thank you for
Senator Brown. The Chair will call up the next panel, Allan
Winkler, James Galbraith, Lee Ohanian, and Brad DeLong, if the
four of you would join us, please. We will take a moment's
break until they come forward.
Senator Brown. We will come to order again. Thank you all
for joining us.
Dr. Allan Winkler is--I will introduce all four panelists.
I very much appreciate your coming and joining us today and
sharing your wisdom and your thoughts and ideas with us. I will
introduce all four panelists and then we will begin the
testimony, Dr. Winkler, with you, from left to right.
Dr. Winkler is distinguished Professor of History at Miami
University in the great State of Ohio. Thank you for joining
us. He has taught at Yale University, the University of Oregon,
and for 1 year each at the University of Helsinki in Finland,
the University of Amsterdam in the Netherlands, and the
University of Nairobi in Kenya. A prize-winning teacher, he is
the author of ten books, including Franklin Roosevelt and the
Making of Modern America.
Dr. James Galbraith, who I met in 1972 for the first time,
teaches at the LBJ School. He holds degrees from Harvard and
Yale, a Ph.D. in economics in 1981. He served in several
positions on the staff of the U.S. Congress, including
Executive Director of the Joint Economic Committee. Dr.
Galbraith is a Senior Scholar of the Levy Economics Institute
and Chair of the Board of Economists for Peace and Security, a
global professional network. He writes a column for Mother
Jones and occasional commentary in other publications,
including the Texas Observer, the American Prospect, Washington
Monthly, and The Nation.
Lee Ohanian has been a Professor of Economics and Director
of the Ettinger Family Program in Macroeconomic Research at the
University of California-Los Angeles since 1999. Thank you for
joining us, Dr. Ohanian. He also taught at the University of
Minnesota and the University of Pennsylvania. He is a Research
Associate at the National Bureau of Economic Research and has
consulted in various capacities for the Federal Reserve. He has
published numerous studies on the New Deal. I read one of his
recent articles in the Wall Street Journal, so welcome.
Brad DeLong is Professor of Economics at UC-Berkeley, Chair
of the Political Economy of Industrial Societies Major and a
Research Associate of the National Bureau of Economic Research.
He was educated at Harvard. He received his Ph.D. from that
institution in 1987. He joined Berkeley as an Associate
Professor 6 years later and became a full professor in 1997. He
has been a fellow of the National Bureau of Economic Research
and Assistant Professor of Economics at Boston University and a
lecturer at the Department of Economics at MIT. Professor
DeLong also served in the U.S. Government as Deputy Assistant
Secretary of the Treasury for Economic Policy from 1993 to
Dr. Winkler, let us begin with you. Thank you.
STATEMENT OF ALLAN M. WINKLER, PROFESSOR OF HISTORY, MIAMI
UNIVERSITY, OXFORD, OHIO
Mr. Winkler. Thank you very much. It is a pleasure to be
here for two reasons. First of all, as an historian, I have
spent a lot of time reading hearings and transcripts and to be
here is something I appreciate very much. Second, my father was
a beneficiary of the National Youth Administration during the
Depression. That allowed him to continue his education at the
University of Cincinnati and that made a huge difference in his
The New Deal basically was a response to the worst crisis
in American history. It involved efforts to promote relief, to
deal with the ravages of the Depression and create recovery, to
reform elements of the American system, and it worked in all
three different areas. And yet it wasn't a planned operation.
It was haphazard. It was often contradictory, and elements in
one area worked against the grain in terms of elements in
another, and that is a large part of how we have to view it
As Christina Romer indicated earlier, monetary policy
played an important role. Fiscal policy, likewise, could have,
but was not really tried, in part because the conventional
wisdom of the day didn't really understand where things were at
The New Deal revolved around Franklin Roosevelt, who was an
extraordinary leader. In his inaugural address, when he talked
about the need for action and action now, he sounded just the
right note. His comment that the only thing we have to fear is
fear itself was something that really created a sense of
confidence in the American people, and that was hugely
important in what followed.
In the first 100 days, launched almost immediately after
the inauguration, the important element here is that there was
no complete, coherent plan of what was going to happen. The
banking crisis then, as now, was a major issue that had to be
dealt with. The Emergency Banking Act was pushed through almost
without having printed it and by a voice vote. And with that
kind of momentum, Roosevelt proceeded from one thing to another
and it went on from there.
Overall, the New Deal did a range of different things. In
the relief sphere, there were a series of early initiatives
that culminated in 1935 with the Works Progress Administration
that put all kinds of people, ranging from artists and authors
and the like, as well as laborers, back to work, and that was
hugely important. Recovery was something the New Deal
recognized it had to deal with, and the National Industrial
Recovery Act creating the NRA was again important in that area,
even though it never worked particularly well, as I will come
Reform elements were hugely important in the New Deal,
ranging from creation of the Securities and Exchange Commission
to Social Security in 1935 to the Wagner Act to deal with
collective bargaining and the like.
The New Deal was important. It made some huge
contributions. It put people back to work. It saved capitalism.
It restored faith in the American system and revived a sense of
hope in the American people. And yet economically, it never
worked as well as it could have.
As Christina Romer pointed out, monetary policy did lead to
an expansion in the economy, and yet because we were starting
at such a rock bottom low level, those elements were not as
important as otherwise they might have been.
But fiscal policy was the real question. In 1936, John
Maynard Keynes published his major work, The General Theory of
Employment, Interest and Money in which he argued that
Depression was not automatically going to disappear if you
simply waited it out, that what was necessary to make that
happen, in his phrase, was deliberate sustained countercyclical
spending. It was necessary for private spending to occur, if
that could happen. If not, the government needed to step in.
And yet Keynesian analysis never really caught hold during
the Great Depression. Keynes and Roosevelt met one another on a
couple of brief occasions. Neither man understood the other.
Keynes understood the New Deal was not proceeding in the
directions that he would have counseled, and that was
And the contradictions in economic policy, according to
Keynesian analysis, really give us some perspective on what was
happening. Acts like the Agricultural Adjustment Administration
called for a processing tax that cut into the money that was
being spent to pay farmers not to produce. Social Security, as
was pointed out, was taking money out of people's pockets in
1937, with pensions not to begin until 1942. The cities and
States trying to run surpluses or at least balance their budget
worked against the grain of what was happening with regard to
larger government spending.
When the economy tanked in 1937, when Roosevelt cut WPA
rolls significantly, when he cut back on the budget so that it
was about a third of what it had been before, the economy went
into recession. The lesson learned then was that if you began
to spend, you could bring it back, and that was what happened
in the next couple of years.
What do we take from all of this? I would suggest the
lessons are very clear. Government can make a difference. A
major stimulus, according to Keynesian analysis, is necessary
and essential and can promote recovery. It is above all
important for us to ensure that measures do not work in
contradictory ways and to allow the stimulus to take the effect
that it can have.
Thank you very much.
Senator Brown. Thank you, Dr. Winkler.
STATEMENT OF JAMES K. GALBRAITH, LLOYD M. BENTSEN, JR., CHAIR
IN BUSINESS/GOVERNMENT RELATIONS, LYNDON B. JOHNSON SCHOOL OF
PUBLIC AFFAIRS, UNIVERSITY OF TEXAS AT AUSTIN, AND SENIOR
SCHOLAR, LEVY ECONOMICS INSTITUTE
Mr. Galbraith. Thank you very much, Chairman Brown. It is a
privilege to be here to discuss the New Deal and its relevance
to our present troubles.
In my view, we can distill three main principles for
economic policy from the Great Depression, the New Deal, and
ultimately from the Second World War.
The first is that unregulated capitalism is not necessarily
self-correcting; mass unemployment, which a previous generation
of economists thought was always going to be a temporary
aberration, can, in fact, occur and it can persist with no
automatic tendency for it to disappear.
The second is that economic intervention by public policy
works best when it is targeted directly to the broad population
rather than filtered through those at the top, and, of course,
when it is implemented on a sufficiently large scale. Now, we
can come back to the discussion of whether the New Deal
operated on a sufficiently large scale. Certainly in the Second
World War we did.
Third--and Professor Winkler has already alluded to this--
the fiscal cutbacks which produced the recession of 1937-38
showed that backtracking is disastrous. There will come a time
when the private economy is sufficiently robust and resilient
to launch and sustain economic growth on its own, but that time
need not come particularly soon. And to anticipate it
prematurely can lead to a severe interruption of the progress
In my brief remarks to follow, I shall summarize points
that are made in great detail in my written testimony in four
The first is that, like our present troubles, the Great
Depression flowed from a collapse of the banking system and of
asset values--the Great Crash of October 1929 and subsequent
events. This was a fundamental and unprecedented development in
the American economy in the depth and extent of the financial
calamity, and it eliminated the possibility that recovery could
be led by a revival of the financial system. The result of this
was that Roosevelt effectively bypassed the financial system
via public spending and also through direct lending to the
private sector using the Reconstruction Finance Corporation and
I do not subscribe to the view that monetary policy caused
the Depression--I think that view was and is advanced by those
who seek to minimize the inherent instability of the financial
sector in those days. Nor do I subscribe to the view that
monetary policy played the principal role in getting us out.
The second point: Much of the New Deal was not, in fact,
about fiscal expansion but about the creation of a
comprehensive network of social insurance and social
protections, and the construction of institutions for
collective action inside the population, including trade
unions. This was true, for example, of the philosophy behind
deposit insurance, behind the creation of the Social Security
system to protect the elderly, behind the Agricultural
Adjustment Administration, and also the much maligned National
Industrial Recovery Act, certainly true of the philosophy
behind the National Labor Relations Act and the creation of the
Each of these institutions played an important role in
reducing the amount of instability, insecurity, and privation
in the broad population. Each played an important role in the
moral and psychological recovery from the Great Depression,
even if their contributions to aggregate effective demand and
economic growth may appear in retrospect to be relatively
modest. Strengthening social insurance is, therefore, extremely
Third, there were, of course, massive employment programs.
From the beginning of the New Deal, 3.5 million or so people
were employed in jobs directly in the public sector, and this
had a very important effect.
It is important to say that the principle behind these
programs was not a short-run Keynesian stimulus. It was not
designed to return the economy quickly back to the allegedly
normal condition of the 1920s but, rather, to provide immediate
and necessary relief to legions of people who would otherwise
not have been able to eat.
And it is important also to note that in terms of the
effects on unemployment, the impact of these programs has been
largely misstated in the literature, in a great deal of the
literature, because economists in subsequent years have adopted
the habit of not counting people who worked for the New Deal as
employed, although, in fact, they were fully employed, working
every day and being paid for their labors.
Finally, in addition to its employment programs, the New
Deal embarked on a massive program of public investment, which
was strongly oriented toward the long term, toward the benefits
of education, transportation, art, culture, and conservation.
Those programs also had macroeconomic effects, but the
important thing about them is that they, in fact, rebuilt the
I just want to close with a brief quotation from a recent
paper by an economist named Marshall Auerback, which I think
captures the flavor of this particular aspect of the New Deal
in a very effective way. He writes, ``The government hired
about 60 percent of the unemployed in public works and
conservation projects that planted a billion trees, saved the
whooping crane, modernized rural America, and built such
diverse projects as the Cathedral of Learning in Pittsburgh,
the Montana State capitol, much of the Chicago lakefront, New
York's Lincoln Tunnel and Triborough Bridge complex, the
Tennessee Valley Authority and the aircraft carriers Enterprise
and Yorktown. It also built or renovated 2,500 hospitals,
45,000 schools, 13,000 parks and playgrounds, 7,800 bridges,
700,000 miles of roads, and a thousand airfields. And it
employed 50,000 teachers, rebuilt the country's entire rural
school system, and hired 3,000 writers, musicians, sculptors
and painters, including Willem de Kooning and Jackson
The point, I think, is that the New Deal was not an effort
to return the country to the prosperity of the 1920s. Rather,
it recognized that the conditions of that period could not be
re-created, set out to do something quite different, and did so
with very considerable success.
Senator Brown. Thank you, Dr. Galbraith.
Dr. Ohanian, welcome. Thank you for coming all the way from
STATEMENT OF LEE E. OHANIAN, PROFESSOR OF ECONOMICS, AND
DIRECTOR, ETTINGER FAMILY PROGRAM IN
Mr. Ohanian. Thank you, Mr. Chairman.
Over the decade, much of my research has focused in the
area of economic crises, including work on the Great Depression
and the New Deal. My findings indicate that some New Deal
policies, those that impacted industrial product and labor
markets, delayed recovery by impeding the normal competitive
forces of supply and demand from operating. My research also
indicates similar policies put in place by President Hoover
also had a significant contributing effect during the early
In terms of the policies that I have studied, one stands
out, which is the National Industrial Recovery Act. The NIRA
was collusive. It permitted firms within industries to
cooperate, coordinate on setting minimum prices, restricting
expansion of plant and capacity, provided that they paid wages
that were well above trend.
Expanding monopoly depresses output employment, and setting
wages above trend or above levels consistent with market
clearing makes labor expensive and leaves employers to scale
back on employment.
The NIRA was declared unconstitutional in 1935, but my
research indicates that New Deal-type policies continued after
that through lax prosecution of antitrust and on the labor side
through the National Labor Relations Act, which substantially
increased labor bargaining power. During a short period of
time, unions and workers used the sit-down strike in which
workers occupied factories to prevent production, with great
success against companies including GM and U.S. Steel.
Immediately after the Supreme Court upheld the
constitutionality of the Wagner Act, wages in a number of
industries considered by the FTC to be collusive jumped
significantly. This was in, I believe, May 1937, right at the
start of the 1937-38 contraction.
There is significant evidence that these specific New Deal
policies impeded recovery. Some evidence is that the recovery
was delayed. Figures 1 and 2 in my testimony show per capita
output, consumption, and investment, and hours worked. Per
capita consumption, relative to its normal 2-percent trend,
recovers hardly at all. Per capita investment does recover,
rising from about 80 percent below trend to this trough in
1933, but still remained more than 50 percent below trend by
the end of the decade.
Other evidence in what I can point out is that the recovery
failure seems particularly striking in that the economic
fundamentals that were in place at the time seemed--a number of
them seemed to be very healthy. Productivity growth grew very
rapidly after 1933. As mentioned earlier, the banking system
had been stabilized. Liquidity was plentiful. Deflation had
been eliminated. And a number of economists ranging from Milton
Friedman to Nobel Laureates Robert Lucas and Edward Prescott
have pointed to the weak recovery and thought about whether the
Government policies were important here.
Other evidence is that in the sectors that were covered by
these New Deal policies, in particular much of major
manufacturing, wages and prices did indeed jump after NIRA
Codes of Fair Competition were adopted. Moreover, not only were
prices and wages higher in these sectors, but employment was
low. In sectors that were not impacted by the NIRA, for
example, the agricultural sector, employment remained high and
wages were below trend.
Perhaps the most compelling evidence about the failure of
the market economy at that time, that it was distorted, comes
from the fact that hours worked is low, consumption is low, but
the real manufacturing wage is well above trend--10 to 15
percent above trend. The coincidence of such a high wage in
conjunction with the Depression is puzzling because we would
usually think competitive forces would push down that wage and
raise employment, consumption, and output.
The main lesson, I believe, to be learned from the New Deal
is that while a number of New Deal policies were really quite
useful, some, those that distorted product and labor markets
and impeded the normal forces of competition, delayed recovery
and that when we consider policy in future crises and we adopt
what I might call crisis management policies to cushion the
impact of a crisis on the economy, that those policies be
consistent with good, long-run economic incentives.
Thank you very much.
Senator Brown. Thank you, Dr. Ohanian.
Dr. DeLong, thank you for coming all this distance to be
STATEMENT OF J. BRADFORD DELONG, PROFESSOR OF ECONOMICS,
UNIVERSITY OF CALIFORNIA AT BERKELEY
Mr. DeLong. Thank you, Chairman Brown, Senator Merkley.
Drawing lessons from the New Deal requires, first,
understanding what the New Deal was. Franklin Delano Roosevelt
took everything that was on the kitchen shelf and threw it into
the pot on March 4, 1933, and then began stirring, fishing
things out that seemed not to be so tasty and having the
Supreme Court fish a good deal of it out as well; adding
spices, adding new ingredients, all the while watching the
Now, the aspect of the New Deal we focus on today is the
expansionary monetary policy aspect. The conventional interest
rate reductions, the quantitative easing by the Federal Reserve
in the late 1930s, banking sector nationalization and
recapitalization, and fiscal policy expansion--how effective
Well, I think there is a broad, near-consensus that the
expansionary macroeconomic policies of the New Deal era were
effective. Had Senator McCain won the Presidential election
last November, the first panel here would not have had
Christina Romer. She would be back at Berkeley, and I would not
be having to teach her course this semester. Instead, it would
have someone like Douglas Holtz-Eakin or Kevin Hassett or Mark
Zandi, one of John McCain's senior economic advisers, all of
whom would be arguing that New Deal-like monetary and fiscal
stimulus programs were effective as part of arguing for the
McCain fiscal stimulus program that would in all likelihood--or
the McCain banking recapitalization program that would in all
likelihood be proceeding through the Congress.
Now, back at the start of the Great Depression, none of the
major industrial powers of the world pursued these expansionary
macroeconomic policies. They held instead that the government
is best which governs least as far as interventionist policy is
concerned, and they bound themselves with the golden fetters of
the gold standard. Only when these were broken could a New Deal
begin in any of the major industrial countries, and we know
when each of the five major industrial countries of the world
back during the Depression case off its golden fetters and
began its New Deal, we know also how quickly each of them
recovered from the Great Depression. That is the chart up there
on your right.
There is a very strong correlation between how early a
country abandoned gold and began its own individual New Deal on
the one hand and how rapid and complete its recovery was on the
other, as this chart I have reproduced from Barry Eichengreen's
1992 article and then scribbled on myself shows. Those
economies that abandoned the gold standard and started
expansionary monetary and, to a lesser extent, fiscal policies
in 1931 did best; those that abandoned the gold standard in
1933 did second best; France, which waited until the very end
of the 1930s to start its New Deal, did worse.
Statisticians will tell you that if you thought before
looking at this chart that it really did not matter what a New
Deal did, that the pluses and the minuses of New Deal policies
largely offset each other, that if you thought there was only
50-50 chance that New Deals mattered before looking at this
chart, then after looking at this evidence you would be 95
percent sure that New Deals mattered.
Which part of the fiscal and monetary expansion of the New
Deals in all the different countries mattered? Probably all of
them. It is difficult to write down a model of the economy in
which some tools work and others do not. All four of the
aspects operate through boosting spending, either through
boosting the money stock and hoping the velocity of money will
remain unchanged, or through boosting the velocity of money and
hoping that the money stock will remain unchanged. And any
model of the economy in which increases in spending cause not
just inflation but also boost employment and output will see
that all four of these policy tools are likely to be effective.
Which of the four components of macroeconomic policy helped
the most in the New Deal's aiding of recovery? That is a much
more difficult question. Christina Romer, who was here before,
places enormous stress on the quantitative easing policies of
the late 1930s, the mammoth expansions of the money supply even
after interest rates on Treasury securities had already been
reduced to effectively zero, and says it played the most major
role. Professor Galbraith earlier dissented from that.
Did the fiscal policy expansions help? Well, as Christina
Romer said earlier, there were so little of them that it was
hard to say. The gap between the size of the Great Depression
in the United States and the magnitude of the extra-direct
government spending was so large that it is truly hard to see
whether fiscal policy might have mattered.
But as Professor Galbraith said, for evidence of the
ability of fiscal policy to boost employment and production if
used on a sufficiently large scale, we have to wait until World
Monetary policy contraction, banking sector collapse, and
the transformation of irrational exuberance into unwarranted
pessimism carried the U.S. unemployment rate up from 3 percent
to 29 percent--or to 23 percent from 1929 to 1932. Monetary
expansion, banking reform, and small deficits then drove the
unemployment rate down to 9.5 percent by the start of large-
scale mobilization in 1940. And wartime government expenditures
and deficits drove the unemployment rate down to 1.2 percent by
Senator Brown. Thank you, Dr. DeLong.
I will sort of go left to right and ask each of you about 5
minutes' worth of questions if no other Senator shows up, and
then certainly feel free to weigh in on any question I ask any
of the other three.
Dr. Winkler, starting with you, first, tell me about the
National Youth Administration and what it did for your Dad?
Mr. Winkler. He was employed. He ended up working in the
Federal Writers Project for a chunk of time as part of his
responsibilities there. He worked with, oh, Harriet Arnow and a
number of other people writing the Cincinnati and Ohio Guides.
Senator Brown. You cautioned near the end of your testimony
against measures--you cautioned that measures not work in
contradictory ways. What is the potentially biggest damage that
we can do in the way that we have pursued, President Obama and
the House and Senate are pursuing our counterattack, if you
will, on this terrible recession?
Mr. Winkler. The biggest difference between then and now,
in my estimation, is that then they did not really understand
the impact that fiscal policy could have and now we do
understand it. They were not aware of the processing tax in the
AAA and the effect that it was going to have on larger fiscal
policy. They did not really understand what the Social Security
tax was going to do before you are beginning to pay out the
pensions and the like.
We do understand those things now, but the debate about how
much money you should spend and how extensive the spending
should be is one that is comparable to this at this point in
time as well.
It seems to me that with the awareness that we now have to
back off of the kind of spending that we have begun to do would
be a serious mistake in light of what happened during the
Depression and particularly in the 1937 recession period.
Senator Brown. So you are advocating depending on economic
growth in the next 12 months, whether we do additional stimulus
packages of some sort?
Mr. Winkler. I think it is clear that the growth will come,
whether it is in the next 12 months or thereafter, and I think
that one has to basically have faith and confidence that that
will happen and that the deficits will be retired in time. I
think that was something that was not understood at the time of
the Great Depression and during the New Deal, but that I think
we do understand that now.
We had the huge deficits of World War II, and in time, with
the prosperity that followed the war, we were able to get the
country back on a very sound economic footing before long.
Senator Brown. What did you mean when you said Keynes and
FDR did not understand one another? And more importantly than
personal issue is what did that mean to Roosevelt's pursuing
Keynesian economics in any way or Keynes trying to advise
Roosevelt from afar with that letter that was sent December 31,
1933, that open letter to FDR?
Mr. Winkler. It meant that Keynesian economics at that
time, when it perhaps could have had an impact or even a couple
of years later, simply was not tried. It took time until people
began to understand what Keynes was doing and saying. Mariner
Eccles, who was head of the Federal Reserve Board during the
1930s, did understand by the end of the decade what was going
on. Other people began to promote Keynesian theories, Alvin
Hansen and others, and it began to catch on in ways that had
not been the case in the 1930s.
But the fact that the two men basically were talking at
cross purposes in the meeting that they initially had is simply
reflective of the fact that Keynes was not going to be listened
to very coherently at that time.
Senator Brown. What do you make of Hoover's differences
with Andrew Mellon in the last couple of years of his
Presidency when Mellon wanted no government intervention and
Hoover presumably did?
Mr. Winkler. I wished that Hoover had responded, as he did
in his memoirs, the same way much earlier, and I think it could
have made a difference. I think the fact that he did listen to
Mellon during the years after 1929 was catastrophic, and that I
think Mellon's advice was all wrong, and that Hoover would have
been far better off if he had taken advantage of the awareness
that he later had.
Senator Brown. Thank you.
Dr. Galbraith, you spoke of the much maligned NIRA. Dr.
Ohanian pretty much maligned it. Talk to me about that.
Mr. Galbraith. Well, the NIRA was never popular with----
Senator Brown. Your microphone, please.
Mr. Galbraith. The NIRA was never popular with the
economics profession. The Act essentially authorized the
creation of cartels and deflated the Antitrust Act. And it has
been largely dismissed in the historical treatment of the New
Deal, so I do not want to overemphasize my point. Let me simply
say that I think we should be agnostic in retrospect about a
program that was in effect during a 4-year period when
industrial production, in fact, doubled. It would be very hard
to argue that the NIRA impeded industrial recovery, because
industrial recovery was proceeding between 1933 and 1936 at a
very rapid rate.
Senator Brown. There has been discussion from both the two
of you, Dr. Ohanian and you, but really all four of the
panelists, and certainly by critics of the New Deal and
supporters of the New Deal, about the Wagner Act, about, if you
will, the artificial market and intervention that increased
wages, whether it was the sit-down strikes that Dr. Ohanian had
mentioned, the minimum wage, the Wagner Act overall collective
Talk to me, if you would, about--sort of answer his views
that that, in fact, did cost jobs. I believe Dr. Ohanian--and I
certainly want you involved in this discussion, Dr. Ohanian,
what it meant that the lowest growth sectors in terms of jobs
seemed to be the highest wage sectors. I think that is pretty
much what you said. And talk about it in some immediate terms,
Dr. Galbraith, if you would, and then its impact on economic
growth in the 1950s and 1960s, the foundations of the New Deal,
the Wagner Act, as wages were increasing what that did to
employment. Dr. Galbraith, and then I would like to hear your
thoughts, Dr. Ohanian.
Mr. Galbraith. Yes, it is, again, a commonly held view in
the economics profession that high wages cause unemployment,
but the evidence for that proposition has always been extremely
weak. If one believes that the measures that supported trade
unions in the middle 1930s produced unemployment, you have to
then explain why unemployment reached 25 percent in the early
1930s before those measures took effect. And you have to
explain why in the 1950s, very extensive trade union
membership, which had reached 30 percent or more of the labor
force, did not cause a reversion to high unemployment.
One can look at this question also in a comparative context
in the modern world, and a very interesting way of doing that
is to examine the European experience, where we find that quite
systematically across a wide range of countries those which
have more egalitarian wage structures--the Scandinavian
countries and the Northern European countries--as a result of
very long traditions of very high levels of trade union
membership--tend to have systematically lower unemployment
rates, better and more efficiently operating labor markets,
than countries which tolerate very high degrees of inequality.
And there are very good and very conventional theoretical
economic reasons why that would be expected to be the case.
Senator Brown. So why would some critical New Deal policies
emphasize the total hours worked per adult in 1939 were 20
percent or more below their 1929 level? Isn't that an accurate
indicator of what higher wages meant in terms of people with--
Mr. Galbraith. Well, no; 1929 was the peak of an enormous
speculative boom, and one cannot, I think, argue fairly that
the experience of the late 1920s was sustainable. It was not.
It led to a collapse of the financial sector just as the
speculative boom in housing in the middle part of this decade,
toward the end of this decade, led to a collapse of the
financial sector that we are just experiencing. So to draw a
trend line through that period and then say that in 1939 we
were far below the trend is intrinsically questionable.
Beyond that, there is the problem of counting unemployment,
and Brad DeLong I think gave the accurate figures just now. The
unemployment rate in the New Deal period fell from 25 percent
to just under 10 percent by 1936. It then jumped back up again
in the recession of 1937 and was brought down again, as
Roosevelt relaunched the New Deal, back down below 10 percent,
again, before the start of the war.
That is a dramatic accomplishment in the face of the
extremely serious situation that he started with.
Senator Brown. Dr. Ohanian, talk to me about distorted
labor markets and the Wagner Act and minimum wage and what that
did to employment.
Mr. Ohanian. My pleasure. Can I respond to a couple of
points that Mr. Galbraith made?
Senator Brown. Of course, yes, as any of you can. Feel free
in jumping in.
Mr. Ohanian. OK. So I believe Professor Galbraith made
three or four points I would like to respond to. One is the
idea about benchmarking comparisons to the year 1929, and it
actually does turn out that, statistically speaking, a 2-
percent trend literally goes through the year 1929 and captures
the rest of the economy going forward very closely. So a
statistical procedure known as least squares drives that trend
line on, going through 1929 and fitting the remainder of the
economy really quite well.
Another point Dr. Galbraith made was how can it be that
with a higher rate of unionization in the 1950s, that the
economy improved so much compared to the New Deal period. In
terms of how much employment loss is going to be sustained on
the basis of unions or other types of institutions that raise
wages, what is relevant is how high the wage is above this
market-clearing level. The estimates I have produced indicate
that the wage was much higher above this market-clearing level
in the late 1930s than it was immediately after the war.
And, in fact, to get to your question about the Wagner Act,
the Wagner Act, National Labor Relations Act, was significantly
modified by the Taft-Hartley Act in 1947, which provided for
States to have right-to-work States. It gave States the right
to outlaw the closed shop. So what is really central for
understanding how much work was lost is how high the wage is
relative to trend or this market-clearing level rather than the
actual amount of individuals and unions.
Another point Dr. Galbraith made was about unemployment
versus hours worked. I use hours worked as a measure of labor,
as do other macroeconomists, because that is the measure that
we use for trying to understand how much production is
occurring. Unemployment rates are tricky because for long-term
issues, such as we are talking about in the Great Depression,
you know, 9, 10 years, there is something called the
discouraged worker effect in which individuals leave the labor
force, which reduces unemployment.
The final point Dr. Galbraith made was about whether high
wages do cause job loss. Most economists, in my view, do
subscribe to the view that if wages are boosted above the
market-clearing level, that will reduce jobs. The economic
reasoning is well accepted among economists and there is
significant evidence for that.
I am not sure if I covered your initial question about the
Wagner Act, but I would be happy to----
Senator Brown. You did. You did. You did. Thank you.
You acknowledged, Dr. Ohanian, that there are New Deal
policies that were useful, as you said, Social Security, bank
stabilization policies. What is the line between a useful
social safety net and policies that are meddlesome to
interventionist to distorting of the market? Can you share how
you come to those conclusions, or do you just look at each one
individually and make an educated sort of estimate?
Mr. Ohanian. Sure. Well, in my view, among the most useful
policies in the New Deal did establish the basic social safety
net. So unemployment benefits, for example, in my opinion, were
one of the most important parts of the New Deal. Establishing
Senator Brown. I am sorry. So you reject the view that
unemployment extensions would cause some people to not seek
work, therefore distorting the labor market? You don't buy
those sort of conservative arguments that the unemployment
system really causes fewer people to want to work?
Mr. Ohanian. A number of economists have been working on
the difficult issue of how to design unemployment insurance,
disability insurance, other types of social insurance to try to
get incentives right, which is, I believe, what you are talking
about, and at the same time trying to provide enough insurance,
and that is a difficult, difficult question.
What I can tell you is that current research indicates that
the incentive issues become less problematic during periods
when the chances of finding work are extremely low. So, for
example, during the Great Depression when labor markets are
quite distorted, you know, expanding unemployment benefits--
well, they were adopted at that time. But that might have been
a good idea.
In terms of trying to figure out which policies are useful
and which aren't, good policymaking really needs to be
consistent with getting economic incentives right. I believe
there is a large level of agreement among economists about what
constitutes guides for good long-run policy, increasing the
incentives to work, save, and invest, increasing the incentives
and maintaining incentives for financial intermediaries to
intermediate capital efficiently. These are all good guides for
When we see policies that sharply deviate from those good
long-range goals, that is when I say these are policies that
are going to have a negative impact on the economy.
Senator Brown. Thank you.
Dr. DeLong, would you weigh in on the 1929-1939, 20 percent
hours worked for adults, 20 percent lower? Do you think that is
an accurate indicator of----
Mr. DeLong. It is a puzzling question that--and it is
indeed the case that unemployment declined, the unemployment
rate declined extremely sharply from 1932 to 1939, from 23
percent down to 11.3 percent, according to the Weir measure,
and practically all of this is indeed an increase in the
fraction of the labor force that has jobs and very little of it
being a discouraged worker effect because that discouraged
worker effect is not present, at least I at least can't see it
in David Weir's Labor Force series.
But nevertheless, it is certainly true that hours of work
per employed person were 13 percent lower in 1939 than in 1929,
and Lee Ohanian wants to conclude that a substantial chunk of
this decline is due to deficient demand, that the economy was
getting better at sharing the available work hours among the
workers but was not producing nearly as much demand for labor
as we would want to see.
This is debatable. In 1949, hours worked per adult were 18
percent. In 1959, they were 17 percent below their 1929 level.
But do we want to conclude that the economy was even more
depressed in the 1950s than it was in 1939? No. The decline in
hours worked tells us a lot about the cycle and the trend, that
the decline in hours worked from 1914 to 1952 does not mean
that the economy was performing much worse in 1952 than it was
The Great Depression comes in the middle of the last sharp
decline in the American work week we have seen and shows us
that Americans back then were deciding collectively to take a
substantial part of their increased technological wealth and
use it to buy increased leisure. And for that reason, I am more
skeptical of the work hours comparison of 1939 to 1932 and 1929
and I tend to think that it makes more sense to take the
unemployment rate as an indicator of how complete recovery is.
Senator Brown. Interesting answer. Thank you.
What role did the Fed play in reversing the Great
Depression? What policies, in particular, should it have
Mr. DeLong. Well, this is--I think when you, in fact, talk
about the Federal Reserve and the Great Depression, there
really are three questions. The first is did the Federal
Reserve cause the Depression? Was the economy going along doing
its normal thing and then the Federal Reserve all of a sudden
decided to do something bad, and as a result we fell into the
Great Depression? And I think the answer to that is clearly no,
that the Great Depression started for other reasons. The
Federal Reserve was simply a bystander, that, as Professor
Galbraith said earlier, there are signs of substantial natural
instability, right, in the economy, at least as it stood in the
interwar period. Then it starts down and it keeps going down.
The second question is, could the Federal Reserve have
interrupted the Great Depression? Milton Friedman and Anna
Jacobson Schwartz's Monetary History of the United States is a
very large and very impressive book. I think Professor
Galbraith calls it magisterial at some point in his written
testimony. It argues the Federal Reserve could by itself have
stopped the Great Depression in its tracks had it done enough
to print up bank reserves, to encourage the Bureau of Engraving
and Printing to print up currency, had it rescued threatened
banks. But the Federal Reserve did not do so.
And this thesis of the Monetary History of the United
States has, I think, taken profound damage over the last 2
years, for Chairman Bernanke of the Federal Reserve and his
team have, via open market operations and now quantitative
easing, they have done exactly what Friedman-Schwartz
recommended and claimed would have stopped the Great Depression
in its tracks. They have expanded bank reserves, the monetary
base, and the money supply to an extent I would not have
believed possible 3 years ago. Yet we all think that this was
not enough, that we need banking policy and probably fiscal
policy, as well, in order to keep the Great Depression
currently the last depression that America has suffered.
I think this is a substantial intellectual loss for
Friedman-Schwartz and an intellectual victory for Bernanke-
Keynes, who argued that all the conventional interest rate and
quantitative easing monetary policy in the world might not be
enough if the capitalization of the banking sector vanished and
the credit channel got itself well and truly clogged, which is
where we seem to be.
The third question is what role did the Federal Reserve
play in spurring recovery, and here we have the debate, and we
have seen a piece of it in the debate between Chairman Romer
and Professor Galbraith earlier, Christina Romer placing a very
heavy weight on the quantitative easing policies of the Federal
Reserve and of the gold inflow during the 1930s, arguing that
even after the Federal Reserve has done everything it can to
lower interest rates on Treasury securities to zero, if it
continues to expand the money supply, well, that money burns a
hole in people's pockets and they spend it and that boosts
spending, and Professor Galbraith placing more stress on what
fiscal expansion there was and on the recovery of the banking
Here, well, my office and Professor Galbraith's office is
1,000 miles away, but in her previous life, Christina Romer's
office is only 50 steps down the hall and she is very, very
impressive and very convincing, so I tend to side with
Christina on that one.
Senator Brown. Fair enough.
I will close with one question, particularly in light of
his last comments about fiscal and monetary policy. I want to
ask the same question of all four of you, and let us close with
that. The question is, expand on whether it is fiscal policy or
monetary policy that was primarily responsible for economic
growth during the Depression in the 1930s and your views of
what that means for today, if you would just take that
question, Dr. Winkler, and each of you work through your
thoughts on that sort of central question.
Mr. Winkler. I have been thinking about fiscal policy and
particularly with regard to the NIRA that came up earlier in
this conversation. There is no question that the NIRA did not
work very well. It was trying to stabilize prices and wages and
hours and the like. In so doing, it probably reversed the
deflationary cycle, but it also discouraged investment.
Business people who were not making profits were not likely to
invest. The point, though, is that they weren't going to invest
anyway. Keynes was absolutely right. This was not working.
Something else needed to be done.
My whole point, I think, has been that fiscal policy could
have made a difference as we look at this in retrospect but did
not because enough was not being spent, at least in the
aggregate. I tend to side with Professor DeLong that monetary
policy did make a difference. Would that fiscal policy have
been permitted to be used in the ways that might have made a
greater difference and ended the Depression sooner.
Senator Brown. Thank you.
Mr. Galbraith. The judgment of contemporaries was that
monetary policy played a very minor role in the recovery from
the Great Depression, and I tend to share that judgment. The
Federal Reserve at the time was regarded as something of a
backwater and I wonder to what extent the present emphasis on
monetary policy in those years may be picking up the work of
other agencies and in particular the Reconstruction Finance
Corporation and the institutions that were set up to help
recapitalize housing and to reconstruct the mortgage business.
But leaving that aside, public spending in the national
income and product accounts increased over 50 percent between
1932 and 1936, and as a share of GDP, federal spending rose
from 10 percent to around 17 percent. That is a substantial
increase both in absolute numbers and in proportions. The
argument that this is an insignificant factor, it seems to me,
is deeply questionable. To establish it, we would need to know
what the multipliers--what the multiplier effects, the knock-on
effects, actually were at that time.
Earlier, you asked a question of Professor Winkler that I
think is very pertinent to this issue, and that was ``What are
the biggest differences between the approach taken in the New
Deal and the approach that we are taking today?'' I would like
just to close by coming back to two differences that I think
are very instructive and important for the design of policy
I think in our present environment, in our present
situation, we are placing much more reliance on policies
intended to resurrect the existing structure of banking and to
get credit flowing again than was true in the early and middle
1930s, and we are likely to fail at this. The present approach
to the banking crisis is actually somewhat more reminiscent of
the early 1930s than it is of the Roosevelt period and likely
to meet the same disappointment as in those early years,
insofar as the problem is not one of a blockage in the pipes of
credit but rather a collapse of asset values and therefore of
the collateral on which credit rests, the demand for credit as
much as of the supply.
That problem can only be solved by reconstructing the
financial position of America's households and businesses. In
the Great Depression, that did not happen, and it didn't really
happen until the Second World War completely recapitalized the
private sector by giving them a vast stock of government bonds,
which became the basis of their financial wealth, of middle-
class prosperity in the post-war period.
The second point is that we are placing too much emphasis
on the idea that by using the short-term Keynesian stimulus, we
can bring ourselves out of this problem in a short period of
time. I think if we do that, we are going to be prone to a
policy reversal with the same danger that Roosevelt experienced
in 1937, that is to say, when you reverse policy, the economy
then punishes you by going back into the tank.
It would be appropriate to take a lesson from the early New
Deal. What is needed here is a comprehensive set of measures
that will build an economy for the future, an economy which, in
particular, deals with two vital, very closely related
challenges. One of them is energy security, because if we don't
deal with our energy security problems, we are going to be at
the mercy of rising oil prices just as soon as aggregate demand
starts expanding aggressively. And second there is climate
change, a problem which we have an opportunity now to deal with
and which if we do not take that opportunity, we will both miss
our chance to put the overall working of the American economy
on an environmentally sustainable basis, and also an
opportunity to take many millions of people and give them
useful employment for many years to come.
Senator Brown. Thank you, Dr. Galbraith.
Mr. Ohanian. If I might just briefly respond to one of the
points Professor DeLong made about how much hours worked were
depressed at the end of the 1930s, so one point I just want to
make is that per capita hours in the 1950s are indeed higher
than they are in the 1930s, just as they were in the 1920s.
The second point, Professor DeLong indicated that as people
become wealthier, they increase their demand for leisure and
hours worked falls. There is not a conclusion about this force
within the Depression. It is an area of active research. But if
that force was operative, the Depression is a period of
declining wealth and income, which would suggest people would
be demanding less leisure rather than more leisure.
Regarding your question about recovery and fiscal versus
monetary policy, expansion output is necessarily due to
expansion either in hours or output per hour. The numbers
indicate there is not much expansion in hours in the 1930s, so
the growth we do see in the 1930s is--most of it is coming from
output per hour or productivity.
Economists don't have a good understanding about cyclical
changes in productivity. Our basic economic reasoning doesn't
point to a substantial link between either fiscal policy or
monetary policy and expansions in productivity. Economic
historian Alexander Field has indicated that the 1930s were a
really remarkable period for productivity growth, true
productivity growth in terms of efficiency gains. I don't see
necessarily either monetary or fiscal policy playing a major
In terms of today's economy, we face, as other panel
members indicated, a different set of problems, in some sense
related but in some sense really quite different. Re-regulating
the financial system is a tall order to fill. It is not an easy
question. There are a number of complicated issues. Currently,
we have a system that has stocked a lot of risk onto the backs
of taxpayers and incentives were in place to make that happen
at some level. So in my view, the major challenge we face is
re-regulating that financial system that became much more
sophisticated and much faster than the current regulatory
framework could deal with. That won't be an easy issue to make
progress on, but in my view, that is the main challenge we
Senator Brown. Thank you.
The last word, Dr. DeLong.
Mr. DeLong. I think that the lesson from viewing fiscal and
monetary policy and government attempts to use them to serve as
balance wheels of the economy since the Great Depression, of
the abandonment of Herbert Hoover Treasury Secretary Andrew
Mellon's dictum that liquidation is actually a healthy process,
part of what economist Joseph Schumpeter called the natural
breathing of the economic organism, that we have abandoned that
and we think we have these policy tools and have been trying to
use them and the question is how effective they are.
And I think the conclusion from 70 years of economists
arguing and watching economies and watching the success of
these tools is that almost all of the time monetary policy is
more effective, and almost all of the time monetary policy is
easier to implement and easier to change when conditions
change, that it moves faster and it also is more flexible.
But then there come times like today, all right, times when
the interest rate on safe short- and medium-term Treasury
securities has been pushed all the way down to zero and in
which you have to ask, if you undertake further expansionary
monetary policy, well, whose incentives are you changing? We
are economists. We believe that people respond to incentives,
that government policies worked by changing the incentives that
people face, but by the time you have pushed interest rates
down to zero and can't push them any further, whose incentives
are you changing by continuing to rely on monetary policy?
And it is in that situation that we are now, and that is
when you start dragging out the other tools of trying to keep
spending in the economy at a normal pace. You know, the
quantitative easing part of monetary policy, that maybe you can
give people so much money it burns a hole in their pocket and
they spend it, that the aggressive banking sector
recapitalizations and government loan guarantee programs that
we see the Treasury trying to roll out now that have their
parallel in operations conducted by the Reconstruction Finance
Corporation during the Great Depression, which had, if I may
say so, an easier time. The RFC had powers to bring banks into
conservatorship without declaring that they were insolvent.
And so to the extent that there is a fear that declaring
that banks are, in the view of the government, insolvent will
cause some kind of crisis of confidence and a shrinkage of the
money stock as people pull their money out of banks, well, the
RFC had tools that would avoid this, and perhaps Tim Geithner's
life would be a little bit easier at the Treasury if he had
And last, there is the fiscal policy, that government
spending, government tax cuts, with the idea that if the
private sector is spending and is not staying stable, well,
maybe the government can add to it and so keep things on an
even keel. And I think the prudent thing is, when asked which
of these should we be doing, is to say yes, all right, that
when there is great uncertainty and when you have a number of
tools for all of which there is some reason to believe they are
at least somewhat effective, we will do what Roosevelt did,
experimentation. Try them all and reinforce the ones that seem
to be working.
Senator Brown. Thank you, Dr. DeLong.
Thank you all for joining us. This is the first of several
hearings that will help Congress shape our response and our
reaction to this economic crisis. I appreciate all of the
service all of you have given by being here today and the good
work you do, each in your institutions.
The record will be open for 7 days for Senator DeMint and
the two other Members of the Subcommittee, and if you want to
revise your remarks or add anything or respond to any of the
questions that you didn't feel that you got to respond to
completely enough, certainly you are free to be in touch with
the Subcommittee to do that, also.
The Committee is adjourned. Thank you very much.
[Whereupon, at 4:34 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF CHRISTINA D. ROMER
President's Council of Economic Advisers
March 31, 2009
Chairman Brown, Ranking Member DeMint, and Members of the
Subcommittee, thank you for inviting me to join you today. In my
previous life, as an economic historian at Berkeley, one of the things
I studied was the Great Depression. And in my current life, as Chair of
the Council of Economic Advisers, I have been on the front lines of the
Administration's policies to help us to end what is arguably the worst
recession our country has experienced since the 1930s. For this reason,
I am delighted to talk with you today about the lessons learned from
the Great Depression and President Roosevelt's New Deal that have
helped inform us--and will continue to help inform us--about the right
approach to dealing with today's economic crisis.
To start, let me point out that though the current recession is
unquestionably severe, it pales in comparison with what our parents and
grandparents experienced in the 1930s. February's employment report
showed that unemployment in the United States has reached 8.1 percent--
a terrible number that signifies a devastating tragedy for millions of
American families. But, at its worst, unemployment in the 1930s reached
nearly 25 percent. \1\ And, that quarter of American workers had
painfully few of the social safety nets that today help families
maintain at least the essentials of life during unemployment. Likewise,
following last month's revision of the GDP statistics, we know that
real GDP has declined almost 2 percent from its peak. But, between the
peak in 1929 and the trough of the great Depression in 1933, real GDP
fell over 25 percent. \2\
\1\ Unemployment data for the 1930s are from Historical Statistics
of the United States: Colonial Times to 1970 (Washington, DC:
Government Printing Office, 1975), Part 1, p. 135, series D86.
\2\ Real GDP data are from the Bureau of Economic Analysis, http:/
/www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, Table 1.1.3.
I don't give these comparisons to minimize the pain the United
States economy is experiencing today, but to provide some crucial
perspective. Perhaps it is the historian and the daughter in me that
finds it important to pay tribute to just what truly horrific
conditions the previous generation of Americans endured and eventually
triumphed over. And, it is the new policymaker in me that wants to be
very clear that we are doing all that we can to make sure that the word
``great'' never applies to the current downturn.
While what we are experiencing is less severe than the Great
Depression, there are parallels that make it a useful point of
comparison and a source for learning about policy responses today. Most
obviously, like the Great Depression, today's downturn had its
fundamental cause in the decline in asset prices and the failure or
near-failure of financial institutions. In 1929, the collapse and
extreme volatility of stock prices led consumers and firms to simply
stop spending. \3\ In the recent episode, the collapse of housing
prices and stock prices has reduced wealth and shaken confidence, and
led to sharp rises in the saving rate as consumers have hunkered down
in the face of greatly reduced and much more uncertain wealth.
\3\ Christina D. Romer, ``The Great Crash and the Onset of the
Great Depression,'' Quarterly Journal of Economics 105 (August 1990):
In the 1930s, the collapse of production and wealth led to
bankruptcies and the disappearance of nearly half of American financial
institutions. \4\ This, in turn, had two devastating consequences: a
collapse of the money supply, as stressed by Milton Friedman and Anna
Schwartz, and a collapse in lending, as stressed by Ben Bernanke. \5\
In the current episode, modern innovations such as derivatives led to a
direct relationship between asset prices and severe stress in financial
institutions. Over the fall, we saw credit dry up and learned just how
crucial lending is to the effective functioning of American businesses
\4\ Data on the number of banks is from Banking and Monetary
Statistics (Washington, DC: Board of Governors of the Federal Reserve
System, 1943), Table 1.
\5\ Milton Friedman and Anna Jacobson Schwartz, A Monetary History
of the United States: 1867-1960 (Princeton, NJ: Princeton University
Press for NBER, 1963), and Ben S. Bernanke, ``Nonmonetary Effects of
the Financial Crisis in the Propagation of the Great Depression,''
American Economic Review 73 (June 1983): 257-276.
Another parallel is the worldwide nature of the decline. A key
feature of the Great Depression was that virtually every industrial
country experienced a severe contraction in production and a terrible
rise in unemployment. \6\ This past year, there was hope that the
current downturn might be mainly an American experience, and so world
demand could remain high and perhaps help pull us through. However,
during the past few months, we have realized that this hope was a false
one. As statistics have poured in, we have learned that Europe, Asia,
and many other areas are facing declines as large as, if not larger
than, our own. Indeed, rather than world demand helping to hold us up,
the fall in U.S. demand has had a devastating impact on export
economies such as Taiwan, China, and South Korea.
\6\ Christina D. Romer, ``The Nation in Depression,'' Journal of
Economic Perspectives 7 (Spring 1993): 19-39.
This similarity of causes between the Depression and today's
recession means that President Obama began his presidency and his drive
for recovery with many of the same challenges that Franklin Roosevelt
faced in 1933. Our consumers and businesses are in no mood to spend or
invest; our financial institutions are severely strained and hesitant
to lend; short-term interest rates are effectively zero, leaving little
room for conventional monetary policy; and world demand provides little
hope for lifting the economy. Yet, the United States did recover from
the Great Depression. What lessons can modern policymakers learn from
that episode that could help them make the recovery faster and stronger
One crucial lesson from the 1930s is that a small fiscal expansion
has only small effects. I wrote a paper in 1992 that said that fiscal
policy was not the key engine of recovery in the Depression. \7\ From
this, some have concluded that I do not believe fiscal policy can work
today or could have worked in the 1930s. Nothing could be farther than
the truth. My argument paralleled E. Cary Brown's famous conclusion
that in the Great Depression, fiscal policy failed to generate recovery
``not because it does not work, but because it was not tried.'' \8\
\7\ Christina D. Romer, ``What Ended the Great Depression?''
Journal of Economic History 52 (December 1992): 757-784.
\8\ E. Cary Brown, ``Fiscal Policy in the Thirties: A
Reappraisal,'' American Economic Review 46 (December): 857-879.
The key fact is that while Roosevelt's fiscal actions through the
New Deal were a bold break from the past, they were nevertheless small
relative to the size of the problem. When Roosevelt took office in
1933, real GDP was more than 30 percent below its normal trend level.
(For comparison, the U.S. economy is currently estimated to be between
5 and 10 percent below trend.) \9\ The emergency spending that
Roosevelt did was precedent-breaking--balanced budgets had certainly
been the norm up to that point. But, it was quite small. As a share of
GDP, the deficit rose by about one and a half percentage points in
1934. \10\ One reason the rise wasn't larger was that a large tax
increase had been passed at the end of the Hoover administration.
Another key fact is that fiscal expansion was not sustained. The
deficit as a share of GDP declined in fiscal 1935 by roughly the same
amount that it had risen in 1934. Roosevelt also experienced the same
inherently procyclical behavior of state and local fiscal actions that
President Obama is facing. Because of balanced budget requirements,
state and local governments are forced to cut spending and raise tax
rates when economic activity declines and state tax revenues fall. At
the same time that Roosevelt was running unprecedented federal
deficits, state and local governments were switching to running
surpluses. \11\ The result was that the total fiscal expansion in the
1930s was very small indeed. As a result, it could only have a modest
direct impact on the state of the economy.
\9\ The 2009 figure is an extrapolation to the current quarter
based on estimates of potential output by the Congressional Budget
2_090107.xls. For 1933, the estimate is based on the facts that the
economy does not appear to have been substantially above trend in 1929
and that real GDP fell 25 percent from 1929 to 1933. Normal growth
would have added at least 10 percent to GDP over this period.
\10\ The deficit figures are from Historical Statistics of the
United States: Colonial Times to 1970, Part 2, p. 1194, series Y337.
Nominal GDP data are from the Bureau of Economic Analysis, http://
www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, Table 1.1.5. I
average calendar year figures to estimate fiscal year values.
\11\ The data on state and local fiscal stance are from the Bureau
of Economic Analysis, http://www.bea.gov/national/nipaweb/
SelectTable.asp?Selected=Y, Table 3.3.
This is a lesson the Obama Administration has taken to heart. The
American Recovery and Reinvestment Act, passed by Congress less than 30
days after the Inauguration, is simply the biggest and boldest
countercyclical fiscal action in history. The nearly $800 billion
fiscal stimulus is roughly equally divided between tax cuts, direct
government investment spending, and aid to the states and people
directly hurt by the recession. The fiscal stimulus is close to 3
percent of GDP in each of the next 2 years. And, as I mentioned, a good
chunk of this stimulus takes the form of fiscal relief to state
governments, so that they do not have to balance their budgets only by
such measures as raising taxes and cutting the employment of nurses,
teachers, and first responders. We expect this fiscal expansion to be
extremely important to countering the terrible job loss that last
month's numbers show now totals 4.4 million since the recession began
14 months ago.
While the direct effects of fiscal stimulus were small in the Great
Depression, I think it is important to acknowledge that there may have
been an indirect effect. Roosevelt's very act of doing something must
have come as a great relief to a country that had been suffering
depression for more than 3 years. To have a President step up to the
challenge and say the country would attack the Depression with the same
fervor and strength it would an invading army surely lessened
uncertainty and calmed fears. Also, signature programs such as the WPA
that directly hired millions of workers no doubt contributed to a sense
of progress and control. In this way, Roosevelt's actions may have been
more beneficial than the usual estimates of fiscal policy suggest. If
the actions President Obama is taking in the current downturn can
generate the same kind of confidence effects, they may also be more
effective than estimates based on conventional multipliers would lead
one to believe.
A second key lesson from the 1930s is that monetary expansion can
help to heal an economy even when interest rates are near zero. In the
same paper where I said fiscal policy was not key in the recovery from
the Great Depression, I argued that monetary expansion was very useful.
But, the monetary expansion took a surprising form: it was essentially
a policy of quantitative easing conducted by the U.S. Treasury. \12\
\12\ Romer, ``What Ended the Great Depression?''
The United States was on a gold standard throughout the Depression.
Part of the explanation for why the Federal Reserve did so little to
counter the financial panics and economic decline was that it was
fighting to defend the gold standard and maintain the prevailing fixed
exchange rate. \13\ In April 1933, Roosevelt temporarily suspended the
convertibility to gold and let the dollar depreciate substantially.
When we went back on gold at the new higher price, large quantities of
gold flowed into the U.S. Treasury from abroad. These gold inflows
serendipitously continued throughout the mid-1930s, as political
tensions mounted in Europe and investors sought the safety of U.S.
\13\ For a comprehensive history of the role of the gold standard
in the Great Depression, see Barry Eichengreen, Golden Fetters: The
Gold Standard and the Great Depression, 1919-1939 (New York: Oxford
University Press, 1992).
Under a gold standard, the Treasury could increase the money supply
without going through the Federal Reserve. It was allowed to issue gold
certificates, which were interchangeable with Federal Reserve notes, on
the basis of the gold it held. When gold flowed in, the Treasury issued
more notes. The result was that the money supply, defined narrowly as
currency and reserves, grew by nearly 17 percent per year between 1933
and 1936. \14\
\14\ Friedman and Schwartz, A Monetary History of the United
States, Table A-1, column 1 and Table A-2, column 3. The growth rate
refers to the period December 1933 to December 1936.
This monetary expansion couldn't lower nominal interest rates
because they were already near zero. What it could do was break
expectations of deflation. Prices had fallen 25 percent between 1929
and 1933. \15\ People throughout the economy expected this deflation to
continue. As a result, the real cost of borrowing and investing was
exceedingly high. Consumers and businesses wanted to sit on any cash
they had because they expected its real purchasing power to increase as
prices fell. Devaluation followed by rapid monetary expansion broke
this deflationary spiral. Expectations of rapid deflation were replaced
by expectations of price stability or even some inflation. This change
in expectations brought real interest rates down dramatically. \16\
\15\ The GDP price index data are from the Bureau of Economic
SelectTable.asp?Selected=Y, Table 1.1.4.
\16\ Romer, ``What Ended the Great Depression?''
The change in the real cost of borrowing and investing appears to
have had a beneficial impact on consumer and firm behavior. The first
thing that turned around was interest-sensitive spending. For example,
car sales surged in the summer of 1933. \17\ One sign that lower real
interest rates were crucial is that real fixed investment and consumer
spending on durables both rose dramatically between 1933 and 1934,
while consumer spending on services barely budged. \18\
\17\ Peter Temin and Barrie A. Wigmore, ``The End of One Big
Deflation,'' Explorations in Economic History 27 (October 1990): 483-
\18\ Data on the components of spending are from the Bureau of
Economic Analysis, http://www.bea.gov/national/nipaweb/
SelectTable.asp?Selected=Y, Table 1.1.3.
In thinking about the lessons from the Great Depression for today,
I want to tread very carefully. A key rule of my current job is that I
do not comment on Federal Reserve policy. So, let me be very clear--I
am not advocating going on a gold standard just so we can go off it
again, or that Secretary Geithner should start conducting monetary
policy. But the experience of the 1930s does suggest that monetary
policy can continue to have an important role to play even when
interest rates are low by affecting expectations, and in particular, by
preventing expectations of deflation.
This discussion of fiscal and monetary policy in the 1930s leads me
to a third lesson from the 1930s: beware of cutting back on stimulus
As I have just described, monetary policy was very expansionary in
the mid-1930s. Fiscal policy, though less expansionary, was also
helpful. Indeed, in 1936 it was inadvertently stimulatory. Largely
because of political pressures, Congress overrode Roosevelt's veto and
gave World War I veterans a large bonus. This caused another one-time
rise in the deficit as a share of GDP of more than 1\1/2\ percentage
And, the economy responded. Growth was very rapid in the mid-1930s.
Real GDP increased 11 percent in 1934, 9 percent in 1935, and 13
percent in 1936. Because the economy was beginning at such a low level,
even these growth rates were not enough to bring it all the way back to
normal. Industrial production finally surpassed its July 1929 peak in
December 1936, but was still well below the level predicted by the pre-
Depression trend. \19\ Unemployment had fallen by close to 10
percentage points--but was still over 15 percent. The economy was on
the road to recovery, but still precarious and not yet at a point where
private demand was ready to carry the full load of generating growth.
\19\ Industrial production data are from the Board of Governors of
the Federal Reserve, http://www.federalreserve.gov/releases/g17/iphist/
In this fragile environment, fiscal policy turned sharply
contractionary. The one-time veterans' bonus ended, and Social Security
taxes were collected for the first time in 1937. As a result, the
deficit-to-GDP ratio was reduced by roughly 2= percentage points.
Monetary policy also turned inadvertently contractionary. The
Federal Reserve was becoming increasingly concerned about inflation in
1936. It was also concerned that, because banks were holding such large
quantities of excess reserves, open-market operations would merely
cause banks to substitute government bonds for excess reserves and
would have no impact on lending. In an effort to put themselves in a
position where they could tighten if they needed to, the Federal
Reserve doubled reserve requirements in three steps in 1936 and 1937.
Unfortunately, banks, shaken by the bank runs of just a few years
before, scrambled to build reserves above the new higher required
levels. As a result, interest rates rose and lending plummeted. \20\
\20\ The data on interest rates are from Banking and Monetary
Statistics, Table 120; the data on lending are from the same source,
The results of the fiscal and monetary double whammy in the
precarious environment were disastrous. GDP rose by only 5 percent in
1937 and then fell by 3 percent in 1938, and unemployment rose
dramatically, reaching 19 percent in 1938. Policymakers soon reversed
course and the strong recovery resumed, but taking the wrong turn in
1937 effectively added 2 years to the Depression.
The 1937 episode is an important cautionary tale for modern
policymakers. At some point, recovery will take on a life of its own,
as rising output generates rising investment and inventory demand
through accelerator effects, and confidence and optimism replace
caution and pessimism. But, we will need to monitor the economy closely
to be sure that the private sector is back in the saddle before
government takes away its crucial lifeline. \21\
\21\ Of course, every episode is different, and the Federal
Reserve will come to its own independent management of monetary policy.
The fourth lesson we can draw from the recovery of the 1930s is
that financial recovery and real recovery go together. When Roosevelt
took office, his immediate actions were largely focused on stabilizing
a collapsing financial system. He declared a national Bank Holiday 2
days after his inauguration, effectively shutting every bank in the
country for a week while the books were checked. This 1930s version of
a ``stress test'' led to the permanent closure of more than 10 percent
of the Nation's banks, but improved confidence in the ones that
remained. \22\ As I discussed before, Roosevelt temporarily suspended
the gold standard, before going back on gold at a lower value for the
dollar, paving the way for increases in the money supply. In June 1933,
Congress passed legislation helping homeowners through the Home Owners
Loan Corporation. \23\ The actual rehabilitation of financial
institutions, obviously took much longer. Indeed, much of the hard work
of recapitalizing banks and dealing with distressed homeowners and
farmers was spread out over 1934 and 1935.
\22\ See Friedman and Schwartz, A Monetary History of the United
States, pp. 328, 421-428, for more information on the 1933 Bank
\23\ For a good description of the various financial stabilization
measures Roosevelt took, see Lester V. Chandler, America's Greatest
Depression, 1929-1941 (New York: Harper & Row, 1970), Chapter 9.
Nevertheless, the immediate actions to stabilize the financial
system had dramatic short-run effects on financial markets. Real stock
prices rose over 40 percent from March to May 1933, commodity prices
soared, and interest-rate spreads shrank. \24\ And, the actions surely
contributed to the economy's rapid growth after 1933, as wealth rose,
confidence improved, and bank failures and home foreclosures declined.
\24\ Stock price data are from Robert Shiller, http://
www.econ.yale.edu/shiller/data.htm. Temin and Wigmore, ``The End of One
Big Deflation,'' describe the behavior of commodity prices and
interest-rate spreads in 1933.
But, it was only after the real recovery was well established that
the financial recovery took firm hold. Real stock prices in March 1935
were more than 10 percent lower than in May 1933; bank lending
continued falling until mid-1935; and real house prices rose only 7
percent from 1933 to 1935. \25\ The strengthening real economy improved
the health of the financial system. Bank profits moved from large and
negative in 1933 to large and positive in 1935, and remained high
through the end of the Depression, with the result that bank
suspensions were minimal after 1933. Real stock prices rose robustly.
Business failures and home foreclosures fell sharply and almost without
interruption after 1932. \26\ And, this virtuous cycle continued as the
financial recovery led to further narrowing of interest-rate spreads
and increased willingness of banks to lend. \27\
\25\ The data on bank lending are from Banking and Monetary
Statistics (Washington, DC: Board of Governors of the Federal reserve
System, 1943), Table 2; the data on house prices are from Robert
\26\ The data on bank suspensions and profits are from Banking and
Monetary Statistics (Section 7 and Table 56, Column 5, respectively).
The data on business failures are from Historical Statistics of the
United States: Colonial Times to 1970, Part 2, p. 912, series V27. The
data on home foreclosures are from Historical Statistics of the United
States: Colonial Times to 1970, Part 2, p. 651, series N301.
\27\ Data on U.S. and corporate bond yields are available in
Banking and Monetary Statistics, Table 128.
This lesson is another one that has been prominent in the minds of
policymakers today. The Administration has from the beginning sought to
create a comprehensive financial sector recovery program. The Financial
Stabilization Plan was announced on February 10, 2009, and has been
steadily put into operation since then. It includes a program to help
stabilize house prices and save responsible homeowners from
foreclosure; a partnership with the Federal Reserve to help restart the
secondary credit market; a program to directly increase lending to
small businesses; the capital assistance program to review the balance
sheets of the largest banks and ensure that they are adequately
capitalized; and the program we announced just last week to partner
with the FDIC, the Federal Reserve, and private investors to help move
legacy or ``toxic'' assets off banks' balance sheets. This sweeping
financial rescue program is central to putting the financial system
back to work for American industry and households and should provide
the lending and stability needed for economic growth. At the same time,
the fiscal stimulus package enacted on February 17th was designed to
create jobs quickly. In doing so, it should lower defaults and improve
balance sheets so that our financial system can continue to strengthen.
The fifth lesson from the 1930s is that worldwide expansionary
policy shares the burdens and the benefits of recovery. Research by
Barry Eichengreen and Jeffrey Sachs shows that going off the gold
standard and increasing the domestic money supply was a key factor in
generating recovery and growth across a wide range of countries in the
1930s. \28\ Importantly, these actions worked to lower world interest
rates and benefit other countries, rather than to just shift expansion
from one country to another.
\28\ Barry Eichengreen and Jeffrey Sachs, ``Exchange Rates and
Economic Recovery in the 1930s,'' Journal of Economic History 45
(December 1985): 925-946.
The implications for today are obvious. The more that countries
throughout the world can move toward monetary and fiscal expansion, the
better off we all will be. In this regard, aggressive fiscal actions in
China and other countries, and the recent reductions in interest rates
in Europe and the U.K. are welcome news. They are paving the way for a
worldwide end to this worldwide recession.
A sixth lesson from the Great Depression is that it is important
not only to deal with the immediate economic crisis, but to put in
place reforms that help prevent future crises. Bank runs were clearly
one of the key factors in the horrific downturn of the 1930s. The
United States suffered four waves of banking panics between the fall of
1930 and the spring of 1933. \29\ In June 1933, President Roosevelt
worked with Congress to establish the Federal Deposit Insurance
Corporation (FDIC). This act, together with subsequent legislation,
established the insurance of bank deposits that we still depend on
\29\ See Friedman and Schwartz, A Monetary History of the United
States, Chapter 7, for a description of the four waves of panics.
The FDIC has been one of the most enduring legacies of the Great
Depression. Financial panics largely disappeared in the 1930s and have
never truly reappeared. The academic literature suggests that deposit
insurance has played a crucial role in this welcome development. \30\
One simple but powerful piece of evidence of the importance of Federal
deposit insurance is that among the very few runs we have seen since
the Depression were ones on non-federally insured savings and loans in
Ohio and Maryland in the 1985. \31\ And, a striking feature of the
current crisis has been the continued faith of the American people in
the safety of their bank deposits. Though near-runs occurred on some
financial institutions this past fall and winter, for the most part
Americans have remained confident that their bank deposits are secure.
In this way, the reforms instituted in response to the Great Depression
almost surely helped prevent the current crisis from reaching Great
\30\ See, for example, Douglas W. Diamond and Philip H. Dybvig,
``Bank Runs, Deposit Insurance, and Liquidity,'' Journal of Political
Economy 91 (June 1983): 401-419.
\31\ See http://www.fdic.gov/bank/historical/s&l/.
The importance of putting in place more fundamental reforms is
another lesson of the New Deal that the Administration is following.
The current crisis has revealed weaknesses in the regulatory framework.
Most obviously, we have discovered that financial institutions have
evolved in ways that left systemically important institutions
inadequately capitalized and monitored. We have also found that the
government lacks the tools necessary to resolve complex financial
institutions that become insolvent in a way that protects both the
financial system and American taxpayers. We look forward to working
with Congress to remedy these and other regulatory shortfalls. By doing
so, we can make the U.S. economy more stable and secure for the next
The final lesson that I want to draw from the 1930s is perhaps the
most crucial. A key feature of the Great Depression is that it did
eventually end. Despite the devastating loss of wealth, chaos in our
financial markets, and a loss of confidence so great that it nearly
destroyed Americans' fundamental faith in capitalism, the economy came
back. Indeed, the growth between 1933 and 1937 was the highest we have
ever experienced outside of wartime. Had the U.S. not had the terrible
policy-induced setback in 1937, we, like most other countries in the
world, would probably have been fully recovered before the outbreak of
World War II.
This fact should give Americans hope. We are starting from a
position far stronger than our parents and grandparents were in during
1933. And, the policy response has been fast, bold, and well-conceived.
If we continue to heed the lessons of the Great Depression, there is
every reason to believe that we will weather this trial and come
through to the other side even stronger than before.
PREPARED STATEMENT OF ALLAN M. WINKLER
Professor of History,
Miami University, Oxford, Ohio
March 31, 2009
The New Deal was a response to the worst economic crisis in
American history. As the United States suffered from the ravages of the
Great Depression, the administration of Franklin D. Roosevelt, which
took office in March 1933, tried a host of different, often
contradictory measures in an aggressive effort to provide relief for
the unemployed, to prompt the recovery of the faltering economic
system, and to propose the kind of structural reform that could protect
people in future crises. But the New Deal was never a coherent,
interconnected effort to deal with the various dimensions of the
Depression in a systematic way. Rather it was a multi-faceted attempt
to deal with different elements of the catastrophe in ways that
sometimes seemed haphazard and occasionally were contradictory. On
balance, though, the New Deal enjoyed some notable accomplishments,
even if it failed to promote full-scale economic recovery.
The Great Depression was an economic disaster. While the stock
market crash of 1929 need not have precipitated a depression,
structural weaknesses in the economy, unbridled speculation in
financial markets, and lack of regulation on Wall Street led to an
unprecedented economic calamity that soon affected the entire world
economy. In the United States, unemployment was the chief symptom of
the depression, and by the time FDR took office there were
approximately 13 million people unemployed--fully one quarter of the
working population--with another quarter underemployed. In some cities,
unemployment reached 75 percent.
The response of President Herbert Hoover did little to alleviate
distress. Though he took a more activist role that many of his
predecessors, his own commitment to individualism and belief that
government should not play an aggressive role in an economic bailout
impeded action, and the few measures he did take had little impact.
Even the Reconstruction Finance Corporation, established as a result of
Democratic pressure, proved unable to reduce unemployment in the Hoover
Franklin D. Roosevelt, elected in 1932, had no clear sense of what
he might do when he assumed office. Some people viewed him as something
of a lightweight. Journalist Walter Lippmann called him an ``amiable
boy scout,'' and on another occasion said, ``He is a pleasant man who,
without any important qualifications for the office, would like very
much to be president. But Roosevelt's experience as Governor of New
York for two terms taught him how he might respond to the economic
FDR struck just the right note in his inaugural address. At a time
when bank failures across the country swept away the savings of
millions of small investors, he promised ``action, and action now,''
and he boosted spirits with his stunning assertion that ``the only
thing we have to fear is fear itself.'' It was clear evidence of a
sense of self-confidence and self-assurance that played a powerful part
in helping Americans feel better in the midst of hard times. Just as
the presidency had been a ``bully pulpit'' for Theodore Roosevelt, it
was ``preeminently a place of moral leadership'' for FDR.
Then he embarked on what came to be called the First Hundred Days.
There was no blueprint. Roosevelt needed to do something about the
banks, and so, working with officials left over from the Hoover
administration, he proposed a bank holiday. The Emergency Banking Act
authorized the Federal Reserve Board to issue new bank notes, allowed
the reopening of banks that had adequate assets, and arranged for the
reorganization of those that did not.
With that somewhat surprising success, he pushed ahead with a
measure to cut the budget, for the conventional wisdom held that a
balanced budget was necessary for economic health, and then a bill to
legalize 3.2 beer, to help make people happy as Prohibition came to an
end. By the time the First Hundred Days came to an end, he had made 10
major speeches, sent 15 messages to Congress, and helped push through
the passage of 15 major pieces of legislation. It was, in short, the
most extraordinary period of legislative activity in American history.
And it set the tone and template for the rest of the New Deal.
Overall, what did the New Deal do?
First, it addressed the unemployed. A Federal Emergency Relief
Administration provided direct assistance to the states, to pass it on
to those out of work. The next winter, a work-relief program provided
jobs in the brief period it existed. Then, in 1935, FDR created the
Works Progress Administration, which paid all kinds of people,
including artists, actors, and authors, to work and built new schools,
bridges, and other structures around the country. It was expensive, to
be sure, but it made a huge economic and emotional difference to the
people it assisted.
Second, the New Deal sought to do something to promote recovery.
The National Recovery Administration attempted to check unbridled
competition which was driving prices down and contributing to a
deflationary spiral. It tried to stabilize wages, prices, and working
hours through detailed codes of fair competition. Meanwhile, the
Agricultural Adjustment Administration sought to stabilize prices in
the farm sector by paying farmers to produce less.
Finally, over the course of the New Deal, the administration
addressed questions of structural reform. The Wagner Act, which created
the National Labor Relations Board in 1935, was a monumental step
forward in giving workers the right to bargain collectively and to
arrange for fair and open elections to determine a bargain agent, if
laborers so chose. The Social Security Act the same year was in many
ways one of the most important New Deal measures, in providing security
for those reaching old age with a self-supporting plan for retirement
pensions. But there were other reform measures as well. The Securities
and Exchange Commission and Federal Deposit Insurance Corporation were
new. And the Glass-Steagall Act, only recently repealed with frightful
consequences, separated commercial and investment banking.
The New Deal was responsible for some powerful and important
accomplishments. It put people back to work. It saved capitalism. It
restored faith in the American economic system, while at the same time
it revived a sense of hope in the American people. But economically, it
was less successful. Monetary policy, as Christina Romer has suggested,
made the most difference. Fiscal policy didn't really work because it
wasn't really tried.
Why, then did the New Deal fail to achieve economic recovery? The
answer rests with the theoretical speculations of English economist
John Maynard Keynes. In 1936, he published his powerfully important
book The General Theory of Employment, Interest and Money, but he had
been lecturing about the concepts for several years to his Cambridge
University students. Basically, Keynes argued that depressions would
not disappear of their own accord. It was rather necessary to take
aggressive action to jump start the economy. Ideally, such action
should come from the private sector. But if such a response was not
forthcoming, the government could act instead. It could spend massive
amounts of money on public works or other projects, or cut taxes, or
both. What was necessary, in Keynes's phrase, was deliberate, sustained
Keynes came to the United States and had one ill-fated meeting with
FDR. Neither man understood the other. Keynes remarked that he had
``supposed that the President was more literate, economically
speaking.'' FDR simply commented that Keynes ``left a whole rigamarole
of figures. He must be a mathematician rather than a political
economist.'' And that was that.
Furthermore, the New Deal often worked in counterproductive ways,
at least economically. Whereas Keynes demanded what we would today call
a major stimulus package, and while the New Deal did spend more than
ever before, it also embarked on contradictory initiatives. For
example, the Agricultural Adjustment Administration spent large amounts
of money to take land out of circulation, to cut down on production and
thereby raise prices. But it diminished the effect of that spending by
paying for it with a sizeable processing tax. Likewise, Social
Security, which aimed to plow a huge amount of money into pensions, was
not slated to make payments until 1942, but began taking money out of
circulation through a withholding tax long before then.
The New Deal also alienated businessmen, something Keynes counseled
against. ``Businessmen have a different sense of delusions from
politicians,'' he once said. ``You could do anything you liked with
them, if you would treat them (even the big ones) not as wolves and
tigers but as domestic animals by nature, even though they have been
badly brought up and not trained as you would wish.'' The NRA alienated
business, and never did encourage private expansion or investment. It
may have halted the deflationary spiral, but it failed to create new
jobs. And it contributed to a measure of ill will. As Roosevelt got
frustrated, his rhetoric marginalized business interests. Speaking of
business interests in the reelection campaign of 1936, he proclaimed,
``They are unanimous in their hate for me--and I welcome their
hatred.'' That may have helped politically, but it hurt economically.
Fiscal policy, in short, along the lines Keynes counseled, did not
work because it was never really tried. The unemployment rate never
dropped below 14 percent, and for the entire decade of the 1930s, it
averaged 17 percent.
Slowly, however, the New Deal learned fiscal lessons In 1937,
assuming that the economy was improving and could manage without
assistance, Roosevelt slashed half of all WPA jobs and cut the
allocation to less than a third of what it had been. At the same time,
workers were just beginning to contribute to Social Security, though
payout were still in the future. Industrial production fell
precipitously. The stock market plunged. Unemployment soared back to 19
percent. A quick restoration of spending brought matters under control.
But spending for World War II really vindicated Keynes and his
theories. With the onset of the war, even before American entrance,
defense spending quadrupled, and unemployment vanished virtually
overnight. The lesson was clear. There was no need to suffer the
ravages of depression any longer. We now had the tools to help the
Some parts of the New Deal worked; some did not. The New Deal
restored a sense of security as it put people back to work. It created
the framework for a regulatory state that could protect the interests
of all Americans, rich and poor, and thereby help the business system
work in more productive ways. It rebuilt the infrastructure of the
United States, providing a network of schools, hospitals, and roads
that served us well for the next 70 years.
Did the New Deal, as has sometimes been charged, exacerbate and
extend the Great Depression? Hardly. The regulatory state provided
protections that benefited all Americans. The administration could have
treated business interests better, but they were often responsible
themselves for the antagonism that persisted throughout the 1930s.
Fiscal policy would certainly have worked better had it been better
understood. The fact that we were slow to embrace Keynesian theory is
one of the disappointments of the decade.
Today, the lessons are clear. Government can make a difference. A
major stimulus is essential and can promote recovery. We need to ensure
that measures do not work in contradictory ways against the stimulus.
We can do something about unemployment. It is as important today as it
was in the 1930s to bolster security, as we turn our attention to
health care reform just as the New Deal crafted a program, pathbreaking
for us, for retirement assistance. The New Deal made a profound
difference in people's lives and in the lives of our Nation. Now it
behooves us to learn from the lessons of the 1930s and take the actions
necessary to promote a return to prosperity.
PREPARED STATEMENT OF JAMES K. GALBRAITH
Lloyd M. Bentsen, Jr., Chair in Business/Government Relations,
Lyndon B. Johnson School of Public Affairs,
University of Texas at Austin, and
Senior Scholar, Levy Economics Institute
March 31, 2009
Chairman Brown, Ranking Member DeMint, and Members of the
Subcommittee, it is a privilege to appear today to discuss the New Deal
and its relevance to our present troubles.
In my view three main principles for economic policy emerged from
the Great Depression, the New Deal, and ultimately from World War II.
The first is that unregulated capitalism is not necessarily self-
correcting; mass unemployment can occur and persist. The second is that
direct economic intervention works best when it is targeted directly to
the broad population--not filtered through those at the top--and when
it is implemented on a sufficiently large scale. Third, the fiscal
cutbacks which produced the recession of 1937-38 showed that
backtracking is disastrous. Once embarked on a policy of expansion and
economic growth, it is essential to see it through to the end.
In what follows, I shall emphasize four points:
Like our present troubles, the Great Depression flowed from
a collapse of the banking system and of asset values--the Great
Crash. This eliminated the possibility that recovery could be
led by a revival of the financial system.
Much of the New Deal involved the creation of comprehensive
social insurance and the construction of institutions for
collective action, including trade unions.
The employment effects of New Deal policies have been
under-rated and misstated in much recent work, in part because
of a widespread misreading of the statistics.
The early New Deal's employment policies were not conceived
as ``fiscal stimulus'' but rather as programs to create jobs
and for public investment. The investment programs were
strongly oriented toward the long-term benefits of education,
transportation, art and culture, and conservation. These
programs had important macroeconomic effects but they also
rebuilt the country.
1. The New Deal emerged from the Great Depression, and the
Roosevelt administration understood very well that the Depression
originated in the Great Crash of 1929 and in the collapse of the
banking system in 1930. At the heart of the problem, as the Pecora
investigations revealed, lay a culture of corruption, speculation, and
self-dealing on Wall Street, and a well-justified loss of confidence by
the public in the captains of finance.
Virtually every bank in America was shut when Roosevelt took
office. His first act, the bank holiday, permitted them to be inspected
and reopened; the public understood that those that reopened could be
relied on. Other early actions were to institute federal deposit
insurance so as to put an end to panics and runs, the passage of the
Glass-Steagall Act separating commercial from investment banking, and
the creation of the Securities and Exchange Commission, and the end of
the gold standard. Taken together, these measures amounted to a
comprehensive assertion of state power over finance. This power was
reinforced in 1944 by the creation of the Bretton Woods system of
fixed-but-adjustable exchange rates along with capital controls, and
was largely maintained until that system was abandoned by Richard Nixon
in 1971. The principal result was that economic growth was
comparatively strong, stable and free of financial crises for a
generation following the war, and with stable growth came a slow but
steady decline in the inequality of income and wealth.
The early New Deal marked a fundamental break with the previous
role of the banks. In the Hoover administration and also in England in
the early 1930s, a reflexive concern of financial policy was to
reassure the markets--hence the phrase ``prosperity is just around the
corner''--and to support the major banks by staying on the gold
standard. This was the natural viewpoint of men who had spent their
lives at the center of the New York and London financial worlds. But
banks did not resume lending, in the depths of the depression, simply
because they had gold in their vaults. There was no one to lend to,
nothing to lend against. A first lesson of the Depression is that
stuffing the banks with money does not solve a credit freeze.
The New Deal dealt with this problem bypassing the banks, or in
some cases running them directly, through the Reconstruction Finance
Corporation. Roosevelt also created new institutions, new public
agencies to provide jobs and stabilize prices, wages and purchasing
power. Thus the initial and indeed the later phases of the New Deal had
three especially important elements beyond the regulation of finance:
the introduction of comprehensive social insurance, the use of public
spending to create jobs, and vast programs of conservation and public
investment, effectively rebuilding the entire country from one end to
2. Social insurance addressed a fundamental problem of capitalism:
unregulated private markets are unstable. They cannot be relied on to
provide an adequate minimum living standard for the working population.
They cannot be relied on to provide a secure repository for savings.
They cannot be relied upon to provide decent incomes in retirement. The
problem of the Depression was perhaps above all a problem of
insecurity, or as Roosevelt put it, of ``fear itself.'' For most
Americans, what was ``just around the corner'' was not prosperity but
Social innovation under the New Deal was motivated by a desire to
deal with this fact. Deposit insurance, Social Security, farm price
supports, the National Industrial Recovery Act, the minimum wage and
the National Labor Relations Act were all, in different ways, aimed at
establishing stability and decent minima. Some of this horrified the
economists of that day and ours, particularly where the push for
stability contradicted their deep philosophical and even emotional
commitment to competition and antitrust. The NIRA was ruled
unconstitutional by the Supreme Court. And some economists have ever
since labored mightily to demonstrate that unions and minimum wages
increased unemployment, that farm price supports were wasteful and
inefficient, that Social Security discouraged savings. New Dealers
would counter, very simply, that the proven alternatives to these
things were poverty, migration and early death.
3. When Roosevelt took office in March, 1933 the macroeconomic
tools and understanding we have today did not fully exist. \1\ Mass
unemployment had not been persuasively explained by the economics
profession, and was variously blamed in academic circles on trade
unions, on technological change, and on ``events beyond our control.''
Then as now, a large body of academic opinion sought the remedy in
lower wages. Then as now, a fair number of economists understood and
favored the use of public works projects to keep people from starving
or revolution. But the idea that public works could be run on a scale
sufficient to end the Depression was not yet fully worked out. Nor did
the country have the national income statistics or the unemployment
statistics we presently use to analyze these problems: from a
macroeconometric perspective, the government was flying blind.
\1\ Simon Kuznets published the first national income statistics
The New Deal's approach to employment policy was direct and open-
ended. Under Harry Hopkins, jobs were created, as quickly as possible,
to help millions get through the year. The budget was, essentially, an
afterthought. There was no particular emphasis on achieving a high
economic growth rate, for the concept of economic growth (as we know
it) did not yet exist. Nevertheless, the public spending initiatives of
the New Deal did have powerful macroeconomic effects. Industrial
production doubled between December 1932 and December, 1936. This is
worth mentioning because it is sometimes denied: for example, in her
recent book, The Forgotten Man, the journalist Amity Shlaes writes that
industrial production did not rise in the United States after 1932. In
point of fact, it rose very rapidly.
The New Deal's effects on unemployment are behind a widely stated
belief that ``only the war ended the Depression.'' But as the economist
Marshall Auerback has pointed out in a recent paper, widely used
unemployment figures (constructed after the fact) treat the 3.5 million
workers who at the peak were employed by New Deal agencies as though
they were unemployed. The original rationale for this was essentially
ideological, insofar as recovery was defined as recovery of the private
sector. But in practical terms the distinction is absurd. It supposes
that someone building a private house on a temporary construction
project in 1928 is employed, but that the same worker working on the
Lincoln Tunnel in 1935 is not.
I take the liberty here of quoting from Auerback at length:
Even pro-Roosevelt historians such as William Leuchtenburg and
Doris Kearns Goodwin have meekly accepted that the millions of
people in the New Deal workfare programs were unemployed, while
comparable millions of Germans and Japanese, and eventually
French and British, who were dragooned into the armed forces
and defense production industries in the mid- and late 1930s,
were considered to be employed.
This made the Roosevelt administration's economic performance
appear uncompetitive, but it is fairer to argue that the people
employed in government public works and conservation programs
were just as authentically (and much more usefully) employed as
draftees in what became garrison states, while Roosevelt was
rebuilding America at a historic bargain cost.
If these workfare Americans are considered to be unemployed,
the Roosevelt administration reduced unemployment from 25 per
cent in 1933 to 9 per cent in 1936, up to 13 per cent in 1938
(due largely to a reversal of the fiscal activism which had
characterized FDR's first term in office), back to less than 10
per cent at the end of 1940, to less than 1 per cent a year
later when the U.S. was plunged into the Second World War at
the end of 1941. The reasons for the discrepancies in the
unemployment data that have historically arisen out of the New
Deal are that the current sampling method of estimation for
unemployment by the BLS was not developed until 1940, thus
unemployment rates prior to this time have to be estimated and
this leads to some judgment calls. The primary judgment call is
what do about people on work relief. The official series counts
these people as unemployed. . . . A lot of people looked at
these numbers without reading the notes . . . and concluded
Then in 1976, an economist named Michael R. Darby wrote an
article with the delightfully self-explanatory title, ``Three-
and-a-Half Million U.S. Employees Have Been Mislaid.'' What
Darby did was read the notes. Here is what Lebergott had to say
about counting unemployment in the 1930s:
``These estimates for the years prior to 1940 are intended to
measure the number of persons who are totally unemployed,
having no work at all. For the 1930's this concept, however,
does include one large group of persons who had both work and
income from work-those on emergency work. . . . This contrasts
sharply, for example, with the German practice during the
1930's when persons in the labor-force camps were classed as
employed, and Soviet practice which includes employment in
labor camps, if it includes it at all, as employment.''
We would normally not consider people who painted murals for
the WPA to be deemed worse off than those who ``worked'' in
Mauthausen or the Soviet gulag. And yet, until we adjust the
``workfare'' discrepancy, incredibly we count such individuals
as unemployed, even though their position was considerably
better someone generating no income, or working in abysmal
conditions in a slave labor camp. \2\
\2\ Marshall Auerback, ``Time for a New New Deal,'' mimeo, 2009.
To give a sense of the actual reduction in unemployment under the
New Deal, I borrow a chart from Auerback, showing the official series
with (dashed line) and without (solid line) counting those working for
New Deal programs as employed. The chart illustrates that New Deal
policies in fact brought unemployment down from 25 to below 10 percent
before the policy reversal and recession of 1937, and again by 1940--
still before the war.
The New Deal validated the ideas of the economist Richard Kahn, a
close associate of Keynes, who had worked out the ``employment
multiplier'' in the early 1930s; the idea that an increase of
governmental expenditure on public improvements would create jobs both
directly and indirectly: directly in the public service and indirectly
in the private sector. In 1936, Keynes's General Theory translated this
insight from employment to output, giving us the now-familiar concept
of the multiplier effect of increased government spending on national
income. And then, of course, the vast scale of new spending during the
war not only eliminated unemployment but stopped the discussion: the
case that public spending could cure unemployment had, for that
generation, been proved.
By the same token, domestic monetary policy in this period played a
very minor role, to the point where economists of that generation
tended to feel that the Federal Reserve was a backwater. I do not buy
for a single minute the currently fashionable view that ``quantitative
easing'' was primarily responsible for the economic expansion that
occurred after 1933, unless one counts federal loan guarantees and
direct lending as monetary policy. \3\ If somehow the 1930s were a new
golden age of private bank lending (at zero interest rates!) and of new
business fixed investment, that fact completely escaped contemporary
notice. Indeed the phrase ``pushing on a string'' was invented to
describe the impotence of monetary policy at that time.
\3\ The work of Professor Thomas Ferguson on the early New Deal
covers these issues well, especially ``Monetary policy, loan
liquidation and industrial conflict: The Federal Reserve and open
market operations of 1932'' Journal of Economic History, 1984 and
``From Normalcy to New Deal'', International Organization 1984.
Finally, my difference with Professor DeLong on the role of fiscal
policy is that it is by ex ante public spending, not ex post deficits,
that one must measure the strength of fiscal expansion. Public
expenditures rose 55 percent between 1932 and 1934; as a share of
(collapsing) GDP they rose from 10.2 percent in 1932 to 17.4 percent in
1934. I have also never understood how the gold inflow in advance of
WWII was supposed to have been a stimulus, insofar as gold at that time
had been stripped of its monetary role. What stimulated the economy in
1939-1940, of course, was still more public spending, now motivated for
the first time by Keynesian ideas, and export orders.
4. A fourth great area of New Deal achievement lay in the physical,
moral and artistic reconstruction of the Nation. In 1932 the country
was underdeveloped--to take one example, in 1930 my father drove a
Model T Ford from his home in Ontario to Berkeley California, and noted
that from Lincoln, Nebraska to the California line the roads were
unpaved. Auerback has an elegant description of what happened during
the following decade:
The government hired about 60 percent of the unemployed in
public works and conservation projects that planted a billion
trees, saved the whooping crane, modernized rural America, and
built such diverse projects as the Cathedral of Learning in
Pittsburgh, the Montana State capitol, much of the Chicago
lakefront, New York's Lincoln Tunnel and Triborough Bridge
complex, the Tennessee Valley Authority and the aircraft
carriers Enterprise and Yorktown. It also built or renovated
2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds,
7,800 bridges, 700,000 miles of roads, and a thousand
airfields. And it employed 50,000 teachers, rebuilt the
country's entire rural school system, and hired 3,000 writers,
musicians, sculptors and painters, including Willem de Kooning
and Jackson Pollock. \4\
\4\ Auerback, op. cit.
These accomplishments had important Keynesian effects, but they
were not incidental to a short-term Keynesian expansion policy, and
would not have been possible if they were. Major construction projects
require advance planning and they take time to complete. But FDR did
not limit himself to the ``shovel ready'' projects on the ground that
the economy needed only a ``stimulus'' in order to ``get credit flowing
again'' and to return to the happy days of the 1920s. He had no
interest in ever returning to those days. The money-changers had fled
the temple, and he was not about to let them come back. The New Deal
built for the ages, as shown by the fact that its greatest
achievements--from the TVA to Social Security--are still in use.
It is true that there was tension with Roosevelt's team between
Hopkins, head of short term employment at the WPA, and Harold Ickes,
head of the major investment projects of the PWA. My father liked to
tell of a morning when FDR met both men in sequence, heard Hopkins'
case for immediate jobs programs and then Ickes' for worthwhile capital
projects. He told each man, ``You're exactly right!'' After the
meetings, Mrs. Roosevelt remonstrated with her husband: hadn't he
contradicted himself by supporting these two precisely opposed
opinions? The President's response was, ``Eleanor, you're exactly
5. Let me round out this brief overview by noting something the New
Deal did not achieve: it never resurrected the commercial banking
system. The New Deal renegotiated short-term mortgages that could not
be refinanced, creating the 30-year, fixed-rate mortgage that was the
staple of housing finance for the next half-century. It fostered
savings-and-loans through strict regulation of interest rates, and
began the secondary markets for prime mortgages. It ran many failed or
otherwise-failed banks. The Reconstruction Finance Corporation provided
a lending lifeline to private businesses. But private commercial bank
lending remained a minor feature of the recovery picture. By and large,
the collapse of asset values meant that very few people or businesses
could qualify for private commercial bank loans, and the flight to cash
insured that despite low interest rates very few would have wanted them
What eventually began the resurrection of private banking was the
creation of net financial wealth during World War II. In this period,
national income doubled, while output available for civilian use was
held roughly constant. Thus working families had roughly twice the
income they could spend, and rigorous price controls prevented
inflation that would have absorbed the nominal incomes. Americans were
therefore willing to lend their excess incomes back to the government
to finance the war effort, and the resulting war bonds, amounting to
125 percent of GDP by the war's end, formed the foundation of the
financial position of the post-war middle class. It was only then (and
following the further contributions to private wealth of the Korean War
in 1950), that the American public became once more a profitable
clientele for private banks. And it was not until considerably later
yet, that the public began to rediscover the stock market.
My final argument is therefore that a banking calamity of the type
experienced in the 1930 and, I would argue, repeated for the first time
beginning in August, 2007, has very long-term effects on the resilience
of the banking system no matter what steps the government may take to
restore output, employment and total capital formation, and no matter
how effective those steps are. There is no easy or swift way back to
rapid credit expansion. And the path is slower and more difficult, if
policy energies are devoted to futile attempts to revive a Paradise
Lost, an economy led and directed by private commercial banking
interests. Even if it were desirable, it probably cannot be done.
6. As part of an exercise yesterday at the Council on Foreign
Relations, I reviewed some of the recent academic literature which
alleges that the New Deal prolonged or even deepened the Great
Depression. The central logic of this argument is the following. In
normal times, it is alleged, without government interference, falling
real wages rapidly restore the conditions for full employment. Since
this did not happen in the 1930s, the argument goes, wages must not
have fallen enough. If one asks why not, the answer is close at hand:
the New Deal's efforts to raise prices and wages, to promote unions,
and to impose a minimum wage were all counterproductive from the
standpoint of maintaining employment. The New Deal is then faulted for
the failure of total output to return to the trend line of the 1920s
until after the start of the Second World War.
In the opening chapters of The General Theory, Keynes specifically
showed that the cuts in money-wages then (as now) being demanded of
workers would not produce the cuts in real wages that were required by
theory, since prices would also fall. Correspondingly, raising both
prices and wages does not raise real wages as the argument claims.
But the argument has other flaws as well. First, it ignores the
depth of the Great Depression, and begs the question of how and why
unemployment rose to 25 percent by the end of 1932--before Roosevelt
took office and therefore before any of the alleged mistakes of the
early New Deal had been made. Second, it ignores the extremely rapid
recovery of 1933-36, or rather simply demands to know why that recovery
wasn't more rapid still, asserting in effect that it would have been
still more rapid if nothing by way of policy had been done. This
assertion is simply an act of faith. Third, it assumes that the
speculative bubble of the late 1920s was not unsustainable, and that in
principle growth of the same type could have continued for another
decade (or even indefinitely). This is tantamount to asserting that the
Great Crash had no roots in the unsafe banking practices of that
earlier time, and no implications for the ensuing Depression.
Suffice to say, I don't think so.
Thank you very much again for your attention.
PREPARED STATEMENT OF LEE E. OHANIAN
Professor of Economics, and Director,
Ettinger Family Program in Macroeconomic Research
March 31, 2009
Chairman Brown, it is a pleasure to have the opportunity to speak
with you about economic policy and lessons from the New Deal. The New
Deal was a collection of policies adopted in response to the Great
Depression that were designed to alleviate economic hardship and
promote economic recovery. Today's economic crisis has prompted many
comparisons to the Great Depression, and has led many to ask whether a
``New'' New Deal is warranted. My research shows that some New Deal
policies significantly delayed economic recovery by impeding the normal
forces of supply and demand, and that the economy would have
experienced a robust recovery in the absence of these policies.
One implication of my research, and other recent research on
protracted economic crises, is that short-run policies designed to
moderate the effects of a crisis--crisis management policies--can
prolong the crisis if those policies impede competitive market forces.
Another implication is that the policymaking process can benefit from
current research on economic crises. Much of the evidence that crisis
management policies can prolong economic downturns is from research
that utilizes recent developments in economic theory and methodologies.
These new research developments can inform the policymaking process.
These views are detailed below.
The recovery from the Depression was indeed slow, and this has been
recognized by a number of economists, including 1976 Nobel Laureate
Milton Friedman (Friedman and Schwartz( 1963)), 1995 Nobel Laureate
Robert Lucas, (Lucas and Rapping (1972)), and 2004 Nobel Laureate
Edward Prescott (1999). My work with Harold Cole (2007) details this
slow recovery. Total hours worked per adult, which is the standard
measure of labor input used in macro-economics, was 27 percent below
its 1929 level in 1933, and remained 21 percent below that level in
1939. There was even less recovery in private hours worked per adult.
Per-capita investment, which declined by nearly 80 percent relative to
trend (2 percent annual growth), remained more than 50 percent below
trend at the end of the 1930s. Per-capita consumption, which was about
25 percent below trend in 1933, remained roughly at that level for the
remainder of the 1930s. Figures 1 and 2 show these data on real output
and its components, and hours worked. The Depression clearly continued
throughout the 1930s.
The failure to recover is puzzling, because economic fundamentals
improved considerably after 1933. Productivity growth was rapid,
liquidity was plentiful, deflation was eliminated, and the banking
system was stabilized. With these fundamentals in place, the normal
forces of supply, demand, and competition should have produced a robust
recovery from the Depression. Figure 3 shows the recovery in
productivity, real bank deposits, and the level of the GNP deflator,
which stops falling after 1933, and rises modestly afterwards. Why
wasn't the recovery stronger?
My research shows that one policy that delayed recovery was the
National Industrial Recovery Act (NIRA), which was the centerpiece of
New Deal recovery policy. The NIRA prevented market forces from working
by permitting industry to collude, including allowing firms within an
industry to set minimum prices, restrict expansion of capacity, and
adopt other collusive arrangements, provided that firms raised wages
considerably. These policies worked. Following government approval of
an industry's ``code of fair competition'', industry prices and wages
Promoting collusion reduces employment and output, while setting
the wage above its market-clearing level depresses employment by making
labor expensive. Employers respond to high wages by reducing employment
relative to the market-clearing level that is jointly determined by
supply and demand. Figure 2 shows hours worked and the real
manufacturing wage. The most striking feature of the graph is that the
continuation of the Depression coincides with rising real wages. This
fact stands in sharp contrast to standard economic reasoning, which
indicates that normal competitive forces should have reduced industry
wage levels and increased employment and output. This coincidence of
high industry wages and low hours worked is one of the most telling
signs that the market process was considerably distorted.
While declared unconstitutional in 1935, the NIRA de facto
continued, with virtually no antitrust activity despite substantial
evidence of collusion documented by the Federal Trade Commission (Cole
and Ohanian (2004)). Wages rose even higher following the Wagner Act in
1935, which greatly increased union bargaining power in wage setting
and which also facilitated unionization. The share of non-agricultural
workers in unions rose from about 12 percent in 1934 to nearly 27
percent in 1938 (Freeman (1998)). During the mid-1930s, the sit-down
strike, in which workers occupied factories and prevent production, was
used most notably against G.M. and the threat of a sit-down strike was
successful against U.S. Steel. Wages jumped in many industries shortly
after the NLRA was upheld by the Supreme Court in 1937, and our
research shows that these higher wages played a significant role in the
1937-38 economic contraction.
By the late 1930s, these New Deal policies began to reverse. Anti-
trust activity was resumed, the Supreme Court ruled against the sit-
down strike, and the growing gap between wages and productivity began
to narrow, particularly during the War, as the National War Labor Board
ruled against wage increases that exceeded cost of living.
After the war, The National Labor Relations Act was substantially
weakened by the Taft-Hartley Act of 1947. Since then, industry wages
have never risen so high above their normal levels.
Despite the fact that several New Deal policies were useful,
including those that established a basic social safety net, and those
that stabilized the banking and financial system, Cole and I have found
that Roosevelt's cartel-high wage policies prolonged the Depression by
several years. In the absence of these policies, we estimate that the
economy would have recovered back to trend quickly, with hours worked
and investment rising well above their normal levels, rather than being
In addition to Friedman and Schwartz (1963), Lucas and Rapping
(1972), and Prescott (1999), there is more research on the New Deal
that draws similar conclusions to mine, including work by Chari, Kehoe,
and McGrattan (2006), and Bordo, Erceg, and Evans (2000). There is also
relevant research on the impact of nonmarket policies on recoveries
from financial crises in other countries. This research also concludes
that nonmarket policies deepen and prolong crises.
Bergoeing, Kehoe, Kehoe, and Soto (2007) examined the recoveries in
Chile and Mexico following financial crises in the early 1980s. Chile
moved quickly to reorganize their banking system and also allowed
inefficient banks and firms to fail. In contrast, Mexico tried to prop
up their economy in the 1980s by maintaining incumbent banks, many of
whom were inefficient, and by providing credit at below-market interest
rates to large firms to keep them afloat. This impeded the necessary
re-allocation of resources from inefficient to efficient producers.
Chile chose to pay the price of economic reorganization and had a
deeper downturn than Mexico during the initial stages of their
respective crises. But since the early 1980s, Chile has grown
substantially. In contrast, the Mexican economic crisis worsened over
time, with per-capita real output falling until the mid-1990s, and
growing little since then. Today, per-capita output in Chile relative
to Mexico has doubled compared to their respective levels prior to the
early 1980s (Fernandez de Cordoba and Kehoe (2009)).
Japan's financial crisis of the early 1990s provides further
evidence on the depressing effects of nonmarket policies that delay
economic reform and prevent competition from working. Hayashi and
Prescott (2007), and Caballero, Hoshi, and Kashyap (2005) studied the
Japanese economy in the 1990s following their financial crisis. Both
studies conclude that Japan's policies that kept otherwise insolvent
banks operating, and that impeded the flow of capital to efficient
firms, significantly prolonged the effect of Japan's crisis, resulting
in a decade-long stagnation of the Japanese economy.
There are two principal messages from the New Deal and these other
economic crises for our current crisis. One is that crisis management
policies designed to reduce the cost of a financial crisis can actually
prolong the depressing effects of these crises by impeding the normal
forces of supply, demand, and competition. Instead, policies should be
consistent with the broader, long-term goals of raising the incentives
for households to work and save, for firms to hire and invest, for the
financial system to efficiently intermediate capital, and for promoting
competition, in which successful businesses thrive, and inefficient
There is relatively little debate among economists regarding the
importance of these long-run guides for successful policy. Short-run
policies that impede these economic forces can delay recovery and
deepen crises, even if other aspects of the policy mix are well-
designed. This means good short-run policy is de facto good-long run
The second message is that policymaking can benefit considerably
from current research on economic crises. Much of the evidence that
short-run policies can prolong crises is from research that utilizes
recent developments in economic theory and quantitative methods.
Consequently, the profession's view about the costs and benefits of
various types of polices has changed over time, including its views
about fiscal policy, one of the key components in the response of
policy to our current crisis.
Many recent discussions about fiscal policy focus on measuring a
``multiplier'', which aims to quantify how much output and employment
will change from an increase in government spending. Much recent
research no longer focuses on this idea, however, largely because there
is no presumption from economic theory about how a change in government
spending impacts employment and output. Instead, economy theory
indicates that the impact depends critically on what the spending is
on, and how it is financed (Baxter and King (1991)).
In practice, research shows that observed differences in the types
of spending and the mix of taxes, over time and across countries, have
a big effect on economic outcomes. My research shows that the effects
of large increases in government spending in the United States are very
sensitive to tax policies (Ohanian (1997)). Specifically, the effect of
government spending on output is smaller if the spending is ultimately
financed with capital income taxes. Edward Prescott (2002) shows that
much of the large decline in hours worked that occurred over the last
40 years in several European countries can be accounted for by an
expansion in government spending that substitutes closely for private
consumption, coupled with a large increase in European tax rates.
Prescott's work thus suggests that for these European countries,
aggressive fiscal policy depressed their economies.
Good economic policymaking is consistent with getting economic
incentives right. This is perhaps the most important lesson from the
New Deal and from other protracted economic crises.
Baxter, Marianne, and Robert King (1991), ``Fiscal Policy in General
Equilibrium'', American Economic Review
Bordo, Michael, Chris Erceg, and Charlie Evans (2000) ``Money, Sticky
Wages, and the Great Depression'', American Economic Review, 2000
Bergoeing, Raphael, Patrick Kehoe, Timothy Kehoe, and Raimundo Soto
(2007) ``A Decade Lost and Found: Mexico and Chile in the 1980s'',
in Timothy Kehoe and Edward C. Prescott, eds., Great Depressions of
the 20th Century, Federal Reserve Bank of Minneapolis
Caballero, Ricardo, Takeo Hoshi, and Anil Kashyap (2005) ``Zombie
Lending and Depressed Restructuring in Japan'', Annals of the
Inter-American Seminar on Economics, Rio de Janeiro
Cole, Harold, and Lee E. Ohanian (2004) ``New Deal Policies and the
Persistence of the Great Depression'', Journal of Political Economy
Cole, Harold, and Lee E. Ohanian (2007), ``A Second Look at the U.S.
Great Depression from a Neoclassical Perspective'', in Great
Depressions of the 20th Century, Timothy Kehoe and Edward Prescott,
Field, Alexander (2003) ``The Most Technologically Progressive Decade
of the Century'', American Economic Review
Fernandez de Cordoba, Gonzalo, and Timothy Kehoe (2009) ``The Current
Financial Crisis: What Should We Learn from Great Depressions of
the 20th Century'', Staff Report 421, Federal Reserve Bank of
Friedman, Milton, and Anna Schwartz (1963) A Monetary History of the
United States, Princeton University Press: Princeton, NJ
Hayashi, Fumio, and Edward C. Prescott (2007) ``The 1990s in Japan: A
Lost Decade'', in Timothy Kehoe and Edward C. Prescott, editors,
Great Depressions of the 20th Century, Federal Reserve Bank of
Lucas, Robert, and Leonard Rapping ``Unemployment in the Great
Depression: Is There a Full Explanation?'' Journal of Political
Economy, Jan. 1972
Ohanian, Lee E. (1997) ``The Macroeconomic Effects of War Finance:
World War II and the Korean War'', American Economic Review
Ohanian, Lee E. (2009), ``What--or Who--Started the Great
Depression?'', under review, Journal of Economic Theory
Mulligan, Casey (2008), ``A Depressing Scenario: When Mortgage Debt
Becomes Unemployment Insurance'', Discussion Paper, University of
Prescott, Edward C. (1999),``Some Observations on the Great
Depression'', Quarterly Review, Federal Reserve Bank of Minneapolis
Prescott, Edward C. (2002), ``Prosperity and Depression'', Ely Lecture,
American Economic Review Papers and Proceedings
Appendix: Responses to Professor DeLong
This addendum section responds to Professor DeLong's comments about
my research, as presented in his March 31, 2009, testimony. [http://
1. Professor DeLong states that Milton Friedman blamed the 1937-38
recession in a recession on higher reserve requirements, not on New
Friedman and Schwartz (1963) stated that New Deal policies
that raised wages and prices delayed recovery. Friedman
restated this view at his 90th birthday party conference at the
University of Chicago in 2002, when he commented on my research
about the New Deal prolonging the Depression.
2. Professor DeLong states that Ohanian's ``impediments to
competition'' hypothesis is not supported by data from the late 1940s,
as Professor DeLong argues that these impediments were even stronger at
that time than during the New Deal.
Measuring labor bargaining power is about wage premia, and
wage premia data show that that bargaining power was
considerably weaker after World War II than during the New
Deal. Under the National Recovery Administration, the
government bargained with industry on behalf of labor. The
program did not rely on unionization to give labor bargaining
power over wages, and wages rose considerably. After 1935, the
Wagner Act initially increased unionized bargaining
substantially, and this drove wages even above their NIRA
levels. These wage increases, which follow the Supreme Court's
ruling upholding the constitutionality of the Wagner Act,
coincide with the 1937-38 recession. Cole and Ohanian (2004)
document that manufacturing wages relative to productivity were
exceptionally high during the New Deal, but return to their
1929 level after the war. They attributed this decline to the
National War Labor Board, the Supreme Court's ruling against
the use of the sit-down strike, and the Taft-Hartley Act, which
substantially weakened labor's position viz-a-viz the original
National Labor Relations Act. Labor bargaining power was lower,
not higher, after the New Deal.
3. Professor DeLong states that ``the same models that tell
Professor Ohanian that starting in 1932 the Depression should have been
over by 1936 also tell him if you start them in 1928 that the Great
Depression did not happen at all.''
Professor DeLong's statement is false. As noted in my
testimony at the hearing on March 31, 2009, my research shows
that similar policies put in place by President Hoover--studied
in a model very similar to my work with Cole (2004)--played a
significant role in accounting for the depth of the Depression
prior to the New Deal (Ohanian (2009)). In fact, Professor
DeLong attended my lecture at U.C. Berkeley in April, 2008 on
this topic. My research concludes that nonmarket policies are a
critical factor in accounting for the Depression under both
Presidents Hoover and Roosevelt.
4. My next response applies to Professor DeLong's statements about
unemployment before and after the New Deal, and hours worked during the
I don't know what Professor DeLong is referring to
regarding unemployment, as my research uses hours worked per
capita, rather than unemployment, as a measure of labor market
performance. I do not use unemployment statistics as those data
do not tell us how much work was restored during the New Deal--
they don't measure either employment or hours per worker. And
unemployment is a notoriously difficult concept to measure, and
becomes even more problematic when one takes into account
factors such as discouraged workers exiting the labor force
(see http://www.bls.gov/cps/lfcharacteristics.htm), which
reduces the unemployment rate, and because there was a great
deal of job sharing during the New Deal, which also biases
unemployment as a measure of labor utilization.
Hours worked is the standard measure of labor used in
macroeconomics, as it is the measure that is relevant for
production. It certainly is the measure to use when reporting
how much work was restored during the New Deal. Cole and I have
analyzed total hours to evaluate the overall impact of the New
Deal, and private hours to examine how the increased market
activity (as opposed to government) activity. There is little
recovery in total hours, and even less in private hours.
More broadly, Professor DeLong raises questions about the data of
the recovery in my testimony. But as my March 31, 2009,
testimony indicates, Figures 1 and 2 show real GDP,
consumption, investment, and hours worked, in each year between
1929-39. None of these years show a significant recovery. The
data are downloadable from www.greatdepressionsbook.com.
But more important, any analysis of the New Deal must confront the
substantial evidence that the labor market failed to clear. My
research and other recent analyses of this period (e.g., Chari,
Kehoe, and McGrattan (2006), Mulligan (2008)) argue that the
New Deal is an episode with industrial wages above normal, and/
or employment and consumption well below normal, indicating a
significant labor market failure. The chronic persistence of
industrial wages well above normal during a Depression stands
in sharp contrast to standard economic reasoning. Professor
DeLong has offered no alternative explanation for these data,
or why the labor market failure worsened during the New Deal.
The decade-long Depression indicates that the central driving
force behind this event was the failure supply and demand to
reduce the wage and increase employment and output.
5. Professor DeLong claims that hours worked at the end of the
1930s were less depressed than the Cole-Ohanian numbers indicate
because the workweek was declining over time as a consequence of rising
wealth which led Americans to consume more leisure.
Professor DeLong's argument is about increased leisure as
choice of households arising from higher wealth. But the
Depression was a period of declining income and wealth, meaning
that this effect would not be operative during the 1930s.
Instead, declining income and wealth would motivate households
to choose less leisure. In any case, I am unaware of any debate
that hours were not significantly depressed in the 1930s. After
all, hours per adult were not only higher in the 1920s, but
also higher in the 1950s and afterwards. Professor Valerie
Ramey who has conducted recent research on trends in hours per
worker and leisure, agrees with the premise that some New Deal
policies delayed recovery, as indicated in Ramey's statements
below about the New Deal in a recent interview: ``Anytime you
put in price and wage controls, you are more likely than not to
make the economy worse off,'' says Valerie Ramey, professor of
economics at University of California, San Diego. ``That's the
lesson of all economic history . . . You don't want to say,
`Oh, don't do any of it,' because some aspects did work, but
they were impeded by other aspects that led the economy to be
worse,'' says Ramey. http://money.cnn.com/2009/02/10/news/
Other Questions about the New Deal and Recovery
The major questions that arose during the March 31, 2009, hearing
were about the growth rate of output, and whether that data was strong
evidence that the New Deal was successful in promoting recovery, and
whether monetary and/or fiscal policy promoted recovery.
Q: Isn't the fact that growth rates of real GDP or industrial
production strong evidence that the New Deal was successful?
A: Not in my view. Using data on output growth, or the growth of
other economic indicators, as evidence on the speed of recovery, first
requires a benchmark of how fast recovery should have occurred. My
research with Cole (2004) indicates that recovery should have been much
faster than observed. Moreover, it is striking that actual industrial
production grew more than 60 percent between July, 1932, and July 1933.
This indicates not only that the economy can generate remarkable growth
rates coming out of a deep depression, but that a recovery was starting
in the summer of 1932, despite the fact that deflation and banking
crises were continuing. That recovery then accelerated considerably in
the spring of 1933, which has been interpreted as business was
producing in advance of the distortions that would be imposed by the
NIRA. Industrial production then began to decline in the summer of
1933, which roughly coincides with the passage of the NIRA.
Q: Was recovery during the New Deal the result of monetary policy,
fiscal policy, or both?
A: In my view, neither was the central factor. Changes in output
are necessarily due to either changes in hours worked, or output per
hour. The data in my testimony show that hours worked recovered little.
Thus, the recovery in output that did occur in the 1930s was by
definition the result of output per worker, or productivity. Cyclical
changes in productivity are still not well understood, but there is no
presumption that either monetary or fiscal stimulus--which typically
are viewed as influencing demand--has strong links to productivity.
Instead, research by Professor Alexander Field (2003) suggests that
higher output per worker was due to changes in productivity gains
brought about by innovation. Thus, the limited recovery of the 1930s
was unlikely driven by demand stimulus.
PREPARED STATEMENT OF J. BRADFORD DELONG
Professor of Economics,
University of California at Berkeley
March 31, 2009
Chairman Brown, Senator DeMint, other Members of the Committee: It
is always an honor to be invited here to participate in a small part in
our self-rule via representative government here in the oldest and
strongest and most successful large Republic in the world. We today
face an economic crisis, and a crisis that has few parallels. Thus we
are driven back to historical analogies. It can be said that economic
theory is always crystallized history, is always us drawing on lessons
from the past. But usually enough of the past has gone into making the
theory that we are happy with the crystallized version. For this
crisis, however, there is only one even close past parallel: the Great
Depression and the New Deal. And so this time it is, I think, best to
drink the history raw.
Drawing lessons from the New Deal for the Great Depression
requires, first, understanding what the New Deal was. Franklin Delano
Roosevelt took everything that was on the kitchen shelf and threw it
into the pot on March 4, 1933, and then began stirring--fishing things
out that seemed nasty (and watching the Supreme Court fish a bunch of
stuff out too), adding spices, adding new ingredients as they came
along, all the while watching the thing cook and trying to turn it into
something tasty. Try everything--and then reinforce and extend the
things that seem to be working well. Ellis Hawley's The New Deal and
the Problem of Monopoly remains the best account of this process. As
Franklin Delano Roosevelt said on May 23, 1932:
The country needs and, unless I mistake its temper, the country
demands bold, persistent experimentation. It is common sense to
take a method and try it. If it fails, admit it frankly and try
another. But above all, try something. The millions who are in
want will not stand idly by silently forever while the things
to satisfy their needs are within easy reach.
It is only after the fact that we can say what the New Deal was.
And it is only after the fact that we can try to assess the parts of it
that were worthwhile and the parts of it that were not. In the middle
of it nobody was really sure what was going on.
I believe that in retrospect the New Deal is best divided into four
components: (a) income redistribution to level the gross inequalities
and inequities that had grown so large in the Gilded Age; (b) social
insurance programs that diminished the risks that Americans would find
themselves destitute and totally dependent on spotty and inadequate
individual acts of charity; (c) structural reforms of the economy; and
(d) what we now call macroeconomic policy--the government's taking
responsibility for and acting as the balance wheel on the aggregate
flow of spending and thus production and employment. Of these I believe
(a) and (b), income redistribution and social insurance, surely made
post-New Deal America a much better place but had little if any impact
on recovery from the Great Depression. I also believe that (c),
structural reforms of the economy, had little or no net impact on
recovery as well. Some of the structural reforms appear to me to have
been well thought-out--REA, NLRA, and Thurman Arnold's drives for
enforcement of the antitrust laws come to mind. Others appear to me to
have been neutral or worse--the NIRA and the PUHCA come to mind.
Indeed, last month I reread John Maynard Keynes's two substantial
letters to Franklin Delano Roosevelt in the 1930s and found that my
conclusions were the same as those of Keynes, who protested:
[A] great deal of what is alleged against the wickedness of
[utility] holding companies is surely wide of the mark. . . .
No one has suggested a procedure by which the eggs can be
unscrambled. Why not . . . leave the existing organizations
undisturbed, so long as the voting power is so rearranged . . .
that it cannot be controlled by . . . a minority . . . ? . . .
Finally, the railroads. . . . Whether hereafter they are
publicly owned or remain in private hands, it is a matter of
national importance that they should be made solvent.
Nationalise them if the time is ripe. If not, take pity . . .
And here too let the dead bury their dead. \1\
\1\ John Maynard Keynes (1938), ``Private Letter to Franklin
Delano Roosevelt of February 1'' http://tinyurl.com/dl20090325a.
You are engaged on a double task, Recovery and Reform . . . For
the first, speed and quick results are essential. The second
may be urgent . . . but haste will be injurious, and wisdom of
long-range purpose is more necessary than immediate achievement
. . . [T]he order of urgency between measures of Recovery and
measures of Reform has [not] been duly observed . . . In
particular, I cannot detect any material aid to recovery in
NIRA . . . The Act is on the Statute Book; a considerable
amount has been done towards implementing it; but it might be
better for the present to allow experience to accumulate . . .
NIRA, which is essentially Reform and probably impedes
Recovery, has been put across too hastily, in the false guise
of being part of the technique of Recovery. \2\
\2\ John Maynard Keynes (1933), ``Open Letter to Franklin Delano
Roosevelt of December 31'' http://tinyurl.com/dl20090325b.
This leaves the fourth aspect of the New Deal--the recovery-
generating aspect--macroeconomic policy, which I also divide into four
components: (a) conventional monetary expansion, (b) quantitative
easing, (c) banking-sector recapitalization and regulation, and (d)
fiscal policy expansion. How effective was it? Let me pause to note
that if this were 6 years ago in 2003 or 8 years ago in 2001 we would
all be taking it for granted that the expansionary monetary and fiscal
policies of the types tried during the New Deal were effective. Indeed,
had Senator McCain won the presidential election last November the
members of this and the previous panel would include one or more senior
McCain economic advisors like Douglas Holtz-Eakin, Kevin Hassett, or
Mark Zandi--all of whom would be arguing that New Deal-like monetary
and fiscal stimulus programs were effective as part of the process of
arguing for the McCain fiscal stimulus program or the McCain banking
recapitalization program that would, had recent history taken another
branch, now be moving through the Congress.
Back at the start of the Great Depression none of the major
industrial powers of the world pursued expansionary macroeconomic
policies. Instead, they held that that government is best which governs
least as far as economic policy was concerned and bound themselves with
the golden fetters of the classical gold standard. A balanced budget
was necessary to maintain confidence that a country would maintain its
gold parity--hence no fiscal policy expansion. Under the gold standard
the domestic money supply was determined by the ebb and flow of gold
reserves--hence no, or rather little, conventional monetary policy or
quantitative easing. And under the gold standard countries except for
Great Britain had very limited powers to support or recapitalize their
own banks: when Austria tried in 1931 it found itself faced with an
immediate choice of abandoning its banking policy or abandoning the
So a New Deal was simply not possible as long as countries remained
on the gold standard during the Great Depression--only after the golden
fetters were cast off could the government even try to use its
monetary, fiscal, and banking policy tools to promote recovery. This
constraint gives us as clear evidence as we want that the New Deal--or
rather New Deals, for each major industrial country during the Great
Depression had its own--mattered for recovery. We know when each of the
five major industrial countries cast off the gold standard fetters and
began its New Deal. We know how quickly each of them recovered from the
There is a strong rank correlation between how early a country
abandoned gold and began its New Deal on the one hand and how rapid and
complete its recovery was on the other, as this chart that I have
reproduced from Eichengreen (1992) and then added to shows. \3\
Statisticians will tell you that if you thought before looking at the
evidence summarized in this rank correlation that there was only a 50-
50 chance that New Deals mattered for recovery, then after looking at
this evidence you should rationally be 95.2 percent sure that New Deals
\3\ Barry J. Eichengreen (1992), ``The Origins and Nature of the
Great Slump Revisited,'' Economic History Review 45:2 (May), pp. 213-
We economists are pretty sure that all four components of
macroeconomic policy helped. It is very hard to write down a model of
the economy in which some tools work and others do not. All four
operate through boosting spending--conventional monetary policy and
banking-recapitalization policy by lowering the interest rates that
businesses seeking funding to spend on expanding capacity are charged,
quantitative easing by putting cash in people's pockets that burns a
hole through them if not spent, fiscal policy expansion by having the
government spend directly. Any model of the economy in which increases
in spending boost not just prices but production and employment will
see all four be effective. Any model of the economy in which increases
in spending just cause inflation but don't boost employment and output
will see none of them be effective--but we already know that the odds
of such being the right model are only 4.8 percent at best.
Which of the four components of macroeconomic policy helped the
most in the New Deals' aiding of recovery? That is a much more
difficult question. The Depression itself provides little evidence of
the balance of power between monetary, banking, and fiscal policy.
Christina Romer argues powerfully that quantitative easing was
decisive--that ``nearly all the observed recovery of the U.S. economy
[starting in 1933] prior to [the beginning of World War II] in 1942 was
due to monetary expansion,'' and this monetary expansion was entirely
quantitative easing because conventional interest-rate open-market
policy had been tapped out before the recovery began. \4\ One thing
that students of the Great Depression do agree on is that it is next to
impossible to evaluate how powerful fiscal policy expansion was in the
Great Depression because it simply was not tried on a sufficiently
large scale. As Eichengreen (1992) wrote a decade and a half ago:
\4\ See Christina D. Romer (1992), ``What Ended the Great
Depression?'' Journal of Economic History 52:4 (December, pp. 757-784
In the U.S., the most important fiscal change of the period, in
1932, was a tax increase, not a reduction, observed budget
deficits were small. Cyclically-corrected deficits were smaller
still. This is the conclusion of Brown . . . for the U.S.;
Middleton . . . for Britain; and Jonung . . . for Sweden . . .
In contrast, in countries like the U.S. (and to a lesser extent
the U.K.) the [monetary] expansion of currency and bank
deposits was enormous. The one significant interruption to
monetary expansion in the U.S., in 1937, revealingly coincided
with the one significant interruption to economic recovery . .
. Even in Sweden, renowned for having developed Keynesian
fiscal policy before Keynes, monetary policy did most of the
For evidence of the ability of fiscal policy to boost employment
and production--if used on a sufficiently larges scale--we have to wait
until World War II. Monetary policy contraction, banking-sector
collapse, and the transformation of irrational exuberance into
unwarranted pessimism carried the U.S. unemployment rate from 2.9
percent up to 22.9 percent from 1929 to 1932. Monetary expansion and
banking reform then drove the unemployment rate down to 9.5 percent by
the start of large-scale mobilization in 1940. And wartime government
expenditure and deficits drove the unemployment rate down to 1.2
percent by 1944.
Thus my belief is that the principal lessons of the Great
Depression and the World War II eras for economic recovery are twofold:
1. The government should not sit on its hands. The French government
sat on its hands, relying on its commitment to the gold
standard and the equilibrium-restoring forces of the market to
handle the Depression. As of 1937--eight years after the
previous business-cycle peak--it was still waiting, like Japan
in the 1990s, for the self-correcting forces of the marketplace
to come to its rescue.
2. All four macroeconomic policy tools are likely to have some
power. A prudent policy will not rely on any of conventional
monetary policy or quantitative easing or fiscal expansion or
banking policy alone, but will instead combine all four--and,
like Roosevelt, seek to reinforce success.
The New Deal: Lessons for Today--Questions and Answers
Q: How much has Ben Bernanke's reputation suffered as a result of
his failure to stop the recession?
A: I don't think Bernanke's reputation as an economist has suffered
at all. I think it is stronger than ever. Friedman and Schwartz's
Monetary History of the United States argued that the Federal Reserve
all by itself could have stopped the Great Depression in its tracks--
but did not. This thesis of The Monetary History of the United States
has taken a profound hit over the last 2 years, for Ben Bernanke has--
via open market operations and quantitative easing--done exactly what
Friedman-Schwartz recommended and claimed would have stopped the Great
Depression in its tracks. Yet we all now think that that is not
enough--that we need banking policy and fiscal policy as well. And this
is an intellectual loss for Friedman-Schwartz. But it is an
intellectual victory for Bernanke-Keynes, who argued that all the
conventional interest rate and quantitative easing monetary policy in
the world might not be enough if the capitalization of the banking
sector vanished and the credit channel got itself well and truly
wedged. This is where we seem to be.
Paul Krugman wrote:
Has anyone else noticed that the current crisis sheds light on
one of the great controversies of economic history? A central
theme of Keynes's General Theory was the impotence of monetary
policy in depression-type conditions. But Milton Friedman and
Anna Schwartz, in their magisterial monetary history of the
United States, claimed that the Fed could have prevented the
Great Depression . . . if the Fed had done more--if it had
expanded the monetary base faster and done more to rescue banks
in trouble. So here we are, facing a new crisis reminiscent of
the1930s. And this time the Fed has been spectacularly
aggressive about expanding the monetary base: And guess what--
it doesn't seem to be working well enough.
The Federal Reserve in the Great Depression
Q: Why do we need to do all this fiscal policy and banking policy
stuff? Didn't Milton Friedman and Anna Schwartz prove that the Federal
Reserve caused the Great Depression by inept and destructive policies?
A: I think you have to be careful here. Friedman and Schwartz's
Monetary History of the United States argued not that the Federal
Reserve caused the Great Depression but that the Federal Reserve all by
itself could have stopped the Great Depression--but did not.
This thesis of The Monetary History of the United States has taken
a profound hit over the last 2 years, for Ben Bernanke has--via open
market operations and quantitative easing--done exactly what Friedman-
Schwartz recommended and claimed would have stopped the Great
Depression in its tracks. Yet we all now think that that is not
enough--that we need banking policy and fiscal policy as well.
Government Workers and Unemployment
Q: Amity Shlaes writes that the New Deal did not diminish
unemployment much--that unemployment was 25 percent in 1933 and still
19 percent in 1938. Doesn't this prove that the New Deal was
A: Amity Shlaes is using the Lebergott unemployment series--and
Christie Romer wrote the book, literally--it's her dissertation--on
what is wrong with the Lebergott series. The Romer series or the Weir
series paints a very different picture: a fall in unemployment from 23
percent in 1932 to 9 percent in 1937, a jump back up to 12 percent in
the recession of 1938, and then a fall to 11 percent in 1939.
As Bush Administration Commerce Undersecretary Michael Darby
pointed out, the big difference between the series that matters here
concerns their treatment of government relief workers: is someone
working for the WPA or the CCC employed or unemployed? From the
perspective of ``how good a job is the private sector doing at
generating jobs,'' there is a case for counting them as unemployed. But
if the question is ``did the New Deal help?'' then there is absolutely
no case at all for using the Lebergott series because WPA and CCC
workers had jobs and were very glad to have them. Shlaes has, I think,
simply not read the footnotes to the edition of Historical Statistics
of the United States that she got her numbers out of.
Q: Wasn't the Great Depression really the fault of that dangerous
leftist Herbert Hoover with all of his interventionist meddlings in the
A: Herbert Hoover is an interesting case. He wanted to meddle--he
wanted to be an activist president--but his Treasury Secretary Andrew
Mellon persuaded him not too. Mellon persuaded him to raise taxes
during the Great Depression to assure investors that the U.S. would
stay on the gold standard and not fund government spending by printing
money. Mellon persuaded him to avoid expansionary monetary policy of
any kind. Herbert Hoover did call business leaders into the White House
for conferences, and did plead with them not to fire workers or cut
wages too much, but I have never been able to find any sign that this
had an effect--no sign that industrialists called to the White House
for meetings changed their business practices in any way. Herbert
Hoover did start the Reconstruction Finance Corporation, but funded it
at a very low level. Because of Mellon's blocking position in the
administration, the New Deal could not get under way until 1933.
Afterwards, Herbert Hoover was very angry at himself for taking
Mellon's counsel and at Mellon for giving it. Until George W. Bush
unleashed his White House staff to slime Paul O'Neill, Herbert Hoover
held the record for the most vicious attack by a President on his own
Secretary of the Treasury, writing in his memoirs that he was very
sorry about the influence exercised by:
[T]he ``leave it alone liquidationists'' headed by [my]
Secretary of the Treasury Mellon, who felt that government must
keep its hands off and let the slump liquidate itself. Mr.
Mellon had only one formula: ``Liquidate labor, liquidate
stocks, liquidate the farmers, liquidate real estate.'' He
insisted that, when the people get an inflation brainstorm, the
only way to get it out of their blood is to let it collapse. He
held that even a panic was not altogether a bad thing. He said:
``It will purge the rottenness out of the system. High costs of
living and high living will come down. People will work harder,
live a more moral life. Values will be adjusted, and
enterprising people will pick up the wrecks from less competent
Q: Many economists say that fiscal policy does not work--that
Roosevelt's deficit spending did not pull the U.S. out of the Great
A: They are wrong. Roosevelt's deficit spending did pull the U.S.
out of the Great Depression--but it did not do so until World War II,
which was when the deficit spending really took place. The deficits of
the New Deal era seemed large and shocking to people at the time, but
they were small relative to the scale of the whole economy. Peak
unemployment in the Great Depression hit 23 percent. To reduce that to
5 percent would have required deficits as large as 9 percent of GDP or
more--which we did not have until World War II. Thus it is not
surprising that unemployment stayed above 10 percent until the eve of
World War II.
The NIRA and NLRA as Neutral
Q: Did structural reforms like the NIRA and the NLRA help recovery?
A: I think there is somewhat more than a grain of truth in the
claim that much of the New Deal, especially its structural
interventions in the economy, was ineffective and neutral--as far as
its impact on recovery from the Great Depression was concerned. And
there is a grain of truth in the claim that some of it was
John Maynard Keynes told Roosevelt so in a letter of February 1,
1938. And Keynes went on to argue that the reason the U.S. recovery had
stalled out in1937-1938 was that Roosevelt's policies were not
Keynesian enough--that ``the present [renewed] slump could have been
predicted with absolute certainty'' by anybody knowing the year before
how Roosevelt was going to try to reduce deficit spending and tighten
money. But that the New Deal was not Keynesian enough does not mean
that we should be even less Keynesian now than we are being. And the
argument that Milton Friedman and John Maynard Keynes were both wrong
when they blamed the renewed 1938 downturn on contractionary
macroeconomic policies--well that is an argument that Ohanian is a very
brave man indeed to make.
The NIRA and the NLRA as Harmful
Q: Wasn't the New Deal harmful to recovery because it introduced
blockages into labor and product markets?
A: I don't think anyone has argued that the NIRA and the NLRA
boosted aggregate demand and put more people to work. That said--output
and employment were growing very rapidly in the period when the NIRA
was in effect, so if it was doing harm it seems likely that other
aspects of the New Deal--abandoning the gold standard, giving up the
target of achieving immediate budget balance, quantitative easing--were
doing good. The years during which the NRA was in effect saw the
unemployment rate go from 22.9 percent down to14.4 percent.
And Milton Friedman was certain that the recession of 1937-38 was
not due to the NLRA and to greater union power but rather to a bad
mistake of monetary policy in raising reserve requirements. In early
1937 the Federal Reserve doubled required reserves out of fear of
future inflation, and the economy fell off a cliff as a result. I don't
know anybody who hated strong unions more than Milton Friedman--yet he
did not blame them for the recession of 1937-38.
To step back, the ``impediments to market competition'' that
Ohanian blames for the persistence of the Great Depression were still
around and were stronger than ever in the late 1940s and 1950s. If they
did not produce high structural unemployment then, what reason is there
to think that they produced high structural unemployment in the U.S. in
The NIRA: More
Q: What is your view of Roosevelt's signature initiative of his
first year in office--the National Recovery Administration, the
National Industrial Recovery Act?
A: I believe that my view of the NRA is the same as John Maynard
Keynes's view: that it was a mistake. When I read John Maynard Keynes's
open letter to Franklin Delano Roosevelt of December 31, 1933, I can
hear Keynes desperately trying not to be impolite while discouraging
Roosevelt from any further policy moves along the lines of the NRA.
I cannot detect any material aid to recovery in NIRA . . . The
Act is on the Statute Book; a considerable amount has been done
towards implementing it; but it might be better for the present
to allow experience to accumulate . . . NIRA, which is
essentially Reform and probably impedes Recovery, has been put
across too hastily, in the false guise of being part of the
technique of Recovery.
I think the NIRA could have done significant damage to the economy
had it not been negated by the Supreme Court. As things were, however,
I don't think it had a material effect. Output was too depressed and
demand too low for the NRA codes to have materially depressed it
further during the short time it was in operation.
The NLRA: More
Q: Some economists blame slow recovery from the Great Depression in
the United States on the NLRA and the consequent rise to power of
American labor unions--that they pushed up wages, and so priced workers
out of the labor market.
A: The NLRA came too late to be blamed for the Great Depression.
The most you can do is blame it for the 1937-38 recession. If you are
going to blame strong unions for high unemployment in the late 1930s,
you then have to come up with a reason for why even stronger unions in
the 1950s did not produce high unemployment. And you have to explain
why Milton Friedman disagrees withyou--why Milton Friedman does not see
union power but rather the contraction of the money stock as the cause
of the rise of unemployment in 1937-38.
Slow Recovery From The Depression
Q: Shouldn't the economy have recovered completely from the Great
Depression by 1936? Doesn't the fact that the Great Depression
continued through the 1930s suggest that the New Deal was harmful?
A: The same models that tell Professor Ohanian, starting in 1932,
that the Great Depression should have been over by 1936 also tell him,
if you start them in 1928, that the Great Depression did not happen at
The pattern across industrial economies is: the later you start
your New Deal, the worse you do. That is a striking pattern.
Unemployment Lower Before Roosevelt
Q: If the New Deal was such a success why was unemployment lower
before Roosevelt, as Professor Ohanian says?
A: This is true only for a very peculiar definition of ``before
Roosevelt''--a normal person would think that ``before Roosevelt''
meant 1932 or perhaps the winter of 1932-33. But Cole and Ohanian mean,
instead, an average of 1930-1932. Nineteen-twenty-nine was a boom year
of extremely high unemployment. Nineteen-thirty was an average year.
Nineteen-thirty-one was a bad year. But it was only after the financial
crises of late 1931, say Milton Friedman and Anna Schwartz, that the
cratering of the system of financial intermediation and the sudden rise
in the reserve-deposit and currency-deposit ratios turned the downturn
into the Great Depression. To compare the new deal to the average of
1930-1932 is not just to move the goalpost--it is to pick up the
goalposts and run as fast as you can out of the stadium.
Weekly Hours at the End of the 1930s
Q: Total hours worked per adult in 1939 remained about 21 percent
below their 1929 level--doesn't that prove that the New Deal was a
A: Cole and Ohanian work very hard to try to convince their readers
that things got worse after Roosevelt took office. But, as they know
well, they didn't: things got better--they just did not get enough
better to get employment back to normal until the huge burst of federal
deficit spending that was World War II.
Break their claim into two parts. The first part: unemployment was
22.9 percent in 1932 and down to 11.3 percent in 1939--yes, that tells
us that recovery was incomplete.
The second part: hours of work per employed person were 13 percent
lower in 1939 than in 1929. Cole and Ohanian assume that all of this
decline in hours of work per week per employed person is due to
deficient demand rather than to a much-desired increase in leisure. I
don't think that is right. In 1949 hours worked per adult were 18
percent and in 1959, 17 percent below their 1929 level. But does that
mean that the economy was even more depressed in the 1950s than it was
in 1939? No. You don't want to maintain that the interwar decline in
hours worked tells us about cycle and not trend. Is there anyone who
will say that the decline in hours worked from 1914 to 1952 tells us
that the economy was performing much worse along a business-cycle
dimension in 1952 than it was in 1914? No. The 1914-1950 period saw the
last sharp decline in the American workweek--a decline that does not
mean that the economy was depressed and performing poorly in 1959 or
1949 (or 1939) relative to 1914 or 1929, but instead that Americans had
decided to take a substantial part of their increased technological
wealth and use it to buy increased leisure.
Q: Didn't Roosevelt's New Deal Policies destroy business confidence
and deepen the Great Depression?
A: The most aggressive claim to this effect that I have seen comes
from Professor Bryan Caplan of George Mason, who wrote that: ``[Robert]
Mugabe has made people afraid to invest in Zimbabwe. Why should [Brad]
doubt that--on a smaller scale, of course--Roosevelt made people afraid
to invest in the U.S.?''
The answer is: no, Franklin Delano Roosevelt bears no resemblance
to Robert Mugabe.
And the answer is: no, Franklin Delano Roosevelt's policies did not
depress private investment by making businessmen more scared to invest
in America; when FDR took office, businessmen were already totally
scared to invest in America--net investment was well below zero, and
could hardly drop any further.
Public confidence in markets reached a nadir in 1933, when half the
banks in the country had closed, when Wall Street was out of business,
when the Dow stood at its appalling lows. Before the new deal there was
no securities industry, no banking industry, no mortgage industry, no
capital formation or lending of any kind. Forty percent of home
mortgages were in default. It was only with the passage of New Deal
efforts--the SEC, the FDIC, the FSLIC--that the mechanisms of private
capital began to kick back into gear. Don't take it from me. Take it
from Federal Reserve Chairman Ben Bernanke, who wrote in his essays on
the Great Depression that: ``only with the New Deal's rehabilitation of
the financial system in 1933-35 did the economy begin its slow
emergence from the Great Depression.''