Economic Policy in the 1930s

In this lecture, Claude talks about the war ending the Depression. It seemed to do that, but later, when we discuss the postwar period, we will be sure to point out that the rapid exit from a war economy did not re-start the Depression, as prominent Keynesians predicted at the time.

On a morning late in 1933, in a bedroom on the second floor of the White House, the President of the United States sat propped against his pillows eating a soft-boiled egg and decided what an ounce of gold would be worth that day. Around him were three men: Henry Morgenthau Jr., a Dutchess County gentleman farmer and neighbor whom Roosevelt trusted the way one trusts an old friend rather than an expert; Jesse Jones, the Texas banker who ran the government’s lending agency; and George Warren, a professor of agricultural economics from Cornell who had persuaded the President that the way to lift the whole structure of American prices out of the pit was to raise, day by day, the price the Treasury paid for gold. They had begun the program at thirty-one dollars and thirty-six cents an ounce and were walking it upward by small steps, and the steps had no discernible logic that anyone in the room could reconstruct afterward. On the morning in question Roosevelt proposed to raise the price by twenty-one cents. Morgenthau asked him why twenty-one. The President answered that it was a lucky number, because it was three times seven, and smiled broadly, and the price went up twenty-one cents. Morgenthau went home and confided to his diary that if the public ever learned how the gold price was really set — through a combination of lucky numbers and guesses at the bedside — they would be frightened.

Hold that scene, because it is the truest single image of economic policy in the Great Depression, and it is truer for being a little absurd. George Warren was, in the second half of 1933, arguably the most influential economist alive, and his theory was wrong in the particulars — commodity prices did not obediently follow the domestic gold price the way his graphs promised — and the man who set the price did so from his bed, half in earnest and half in play, because the ordinary machinery for such decisions did not exist and had never been imagined. This is the thing to understand before any of the individual policies can be understood. The United States walked into the worst economic catastrophe in its history equipped with a federal government that had neither the tools, nor the theory, nor the institutions to manage a national economy, for the simple reason that nothing in the American tradition had ever assigned it that job. There was no body of doctrine to consult. There was no lever, clearly marked, that a president could pull to make output rise and unemployment fall. Whether such a lever even existed was itself an open question, argued over by serious men who reached opposite conclusions.

What followed, across a decade, was a search for that lever, conducted by trial and error, in the dark, using whatever materials happened to lie within reach — the emergency powers left over from the last war, the antitrust laws turned inside out, an agricultural economist’s theory of gold, and finally, almost by accident, the discovery that a government which spent without limit could put men back to work, a discovery confirmed only when a second war made the government exactly that kind of buyer. The improvisations contradicted one another. The government spent the middle of the decade organizing American industry into price-fixing cartels and spent the end of the decade prosecuting American industry for the crime of bigness, and it did both under the same President, in the name of the same recovery. A story that wants heroes and villains will not find them here in any stable arrangement, because the men involved kept changing sides as their theories failed them. What can be found is a country improvising a role its founders never wrote for it, under a pressure none of them had foreseen.

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The man who met the Depression first was, by any reasonable accounting, the most qualified human being ever to occupy the office in a moment of crisis. Herbert Hoover had fed occupied Belgium during the Great War, had directed American food relief across a starving Europe, had run the Commerce Department for eight years and turned it into the most energetic agency in Washington, and had come to the presidency with a settled and coherent philosophy of how a modern economy ought to be governed. That philosophy is the key to his conduct, and it is nearly invisible to us now because the world it belonged to has vanished. Hoover believed that the federal government should lead the economy the way a conductor leads an orchestra that is not employed by him: by convening, persuading, coordinating, and setting an example, so that businessmen and bankers and labor leaders, each acting in his own interest but informed by a common understanding, would together do the right thing without being commanded to. He called it, when he called it anything, an “associative” order. Its animating conviction was that direct federal coercion of the economy was both unconstitutional in spirit and clumsy in practice, and that a free people would coordinate voluntarily if only they were shown the way.

When the slump came, Hoover acted on this philosophy with vigor, and one of his first acts contained inside it the whole tragedy of the approach. In November of 1929, within weeks of the crash, he summoned the heads of the great industrial corporations to the White House — the men who ran steel and automobiles and electricity — and extracted from them a pledge. They would not, in the downturn, do what employers had always done in every previous downturn: they would not cut wages. Hoover held to a doctrine, shared by many of the progressive economists of the day, that high wages were the foundation of prosperity, because it was wages that bought the goods the factories made, and that a general wage cut would only shrink the buying power that recovery depended on. So the industrialists went home and, for a remarkably long time, kept their word. Through 1930 and well into 1931, the great firms held money wage rates roughly where they had been.

Consider what that meant against the fact established in the last lecture, the central and cruel fact of the whole episode: prices were falling. When the prices a company receives for its product drop by a fifth while the wage it pays its workers holds steady, the real cost of that labor — the cost measured in the goods the company sells — has risen by a fifth. The employer’s choice narrows to a single door. He cannot cut the wage; he has promised the President he will not. So he cuts the man. Hoover’s wage policy, designed to protect the worker’s purchasing power, protected the wage of the worker who kept his job and helped destroy the job of the worker beside him. The high-wage doctrine turned the labor market’s ordinary shock absorber — a fall in wages that would have spread the loss thinly across many still-employed men — into a wall, against which the adjustment piled up as unemployment instead. It is a clean and painful example of the general pattern of the era: a humane intention, an institution ill-suited to the environment that had arrived, and an outcome that mocked the intention. And it was voluntary to the end. Hoover never commanded the wage; he asked for it, and got it, and that was precisely the trouble, because the thing he asked for was the wrong thing, and the associative order had no brake once the wrong thing was in motion.

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The second inherited blunder came from the Congress rather than the President, though Hoover signed it, and it belongs to the category of adaptations forced by the environment and defeated by it. In June of 1930, with the recession eight months old, Roosevelt’s predecessor put his name to the Tariff Act sponsored by Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon, which raised duties on imported goods to among the highest levels in the nation’s history. The bill had begun, in the campaign of 1928, as a modest promise of relief to farmers suffering from low crop prices, and it had swollen, through the ordinary logmarket of legislative logrolling, into a general wall around the American economy, every industry that could reach a congressman having reached one and secured its own protection.

The economists of the country saw what was coming and said so, with a near-unanimity the profession has rarely achieved before or since. More than a thousand of them — 1,028, the number was counted — signed a public petition begging the President to veto the bill, warning that it would raise the cost of living, injure the export trade, and invite retaliation from the nations whose goods it shut out. Hoover privately agreed with much of it and signed the bill anyway, judging that a president could not break with his party and his Congress on the central economic legislation of the session. The retaliation the economists predicted arrived on schedule. Canada, Britain, France, and a dozen other nations raised their own walls in answer, and the intricate web of world trade, already fraying, tore. American exports, which had stood near seven billion dollars in 1929, fell to barely more than two billion by 1932. The tariff did not cause the Depression, and it is often blamed for more than it did; the collapse of world trade owed more to the collapse of world lending and the strangulation of the gold standard than to any schedule of duties. But it was a wall built exactly when the country needed doors, an attempt to solve a national problem by a national selfishness at a moment when every nation reaching for the same selfishness impoverished them all together. The environment that had arrived was a single interconnected world economy. The institution reached for was the oldest reflex of the nation-state, which was to look after its own and let the neighbors fend, and the reflex made the wound deeper in every country that indulged it.

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Now comes the strangest interval in the whole story, and the one that reveals most starkly how unready the American state was for what had happened to it. Roosevelt defeated Hoover in November of 1932. Under the calendar that then governed the republic, the new President would not take office until the fourth of March, 1933 — four months later. And into those four months fell the final and total collapse of the American banking system, at the precise moment when the country had two presidents and, for all practical purposes, none.

The banks had been failing in waves since 1930, as the last lecture described. Through the winter of 1932 and 1933 the failures became a general panic. Depositors, having watched thousands of banks close and their neighbors’ savings vanish, wanted their money in cash and in hand, and they wanted it everywhere at once, and no banking system built on the promise of paying every depositor on demand can survive every depositor demanding at once. State by state, governors began declaring “bank holidays” — ordering the banks in their states closed for a period, to stop the runs by simply locking the doors. Nevada had gone first, in the autumn. Michigan, a great industrial state, closed all its banks in February. The contagion spread from statehouse to statehouse through the last weeks of the winter, and by the first days of March nearly every bank in the country was either shut or operating under restrictions.

Here was the machinery of the nation’s credit seizing solid, and here was the government unable to act, because the man with the mandate had no authority and the man with the authority had no mandate. Hoover, still President until March, believed the crisis could be checked if Roosevelt would only announce, in advance, that he would keep the dollar sound, balance the budget, and refrain from the inflationary experiments the markets feared. He wrote to Roosevelt, more than once, in longhand, pleading. Roosevelt declined to be bound. He would take no share of responsibility for policy until he held the whole of the power, and he would make no promise in February that might tie his hands in March, and so he answered Hoover’s pleas with courtesy and nothing else. Whether this was cynicism or wisdom is argued still. What is not arguable is that for four months the United States, with its banking system dying, had no one who could both decide and act, and that the vacuum was a structural fact, written into the constitutional calendar, and not merely a failure of the two men who happened to stand in it.

The country drew the institutional lesson, as it sometimes does, and drew it in the only permanent form available. The Twentieth Amendment, ratified that same year, moved every future inauguration up to the twentieth of January, cutting the lame-duck interval by six weeks, so that no President-elect would ever again watch the economy burn for a third of a year while waiting for the power to hold a hose. It is called, aptly, the Lame Duck Amendment. It is the quiet monument to the winter of 1933, a change in the fundamental law of the republic wrung out of the discovery that the old timing, harmless for a century of ordinary transitions, became lethal the one time the transition coincided with a collapse.

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Roosevelt took the oath on the fourth of March, 1933, in the pit of it, and did in his first week the thing his predecessor had spent four months unable to do, and did it with the very tools that had lain unused. On the sixth of March he declared a national bank holiday, closing every bank in the country by federal proclamation — reaching, for the authority, all the way back to the Trading with the Enemy Act of 1917, a war measure aimed at a wartime enemy, now turned against a peacetime panic because it was the nearest instrument that came to hand. Congress, summoned into special session, passed the Emergency Banking Act on the ninth, in a single day, most members voting for a bill they had not read because no printed copies yet existed. The Act had been drafted in a sleepless scramble by the outgoing and incoming Treasury officials together, its principal author the new Secretary, William Woodin — a genial industrialist who built railway cars for a living and composed music for pleasure, and who wrote, in the same season he wrote the banking law, a little piece he called the “Franklin Delano Roosevelt March.” The Act’s mechanism was simple and, as it turned out, sufficient: the government would inspect the banks, reopen the sound ones under federal license, and let the public understand that a bank which opened its doors again had the government’s word that it was solid.

Then Roosevelt did the part that no statute could do. On the evening of Sunday the twelfth of March, he sat before a microphone and spoke to the country over the radio, in plain and unhurried language, explaining what a bank did with a deposit and why a bank could not survive everyone withdrawing at once and why the banks that reopened the next morning could be trusted. Sixty million people listened. It was the first of the talks that came to be called fireside chats, and its effect was the thing that mattered, because the banking crisis was at bottom a crisis of confidence and confidence answers to a voice. When the licensed banks reopened that week, the lines outside them ran the other way: people brought their hoarded currency back and redeposited it. Money that had been buried in mattresses and stuffed behind bricks came back into the system. The hemorrhage stopped, not because the government had changed the arithmetic of banking, but because it had restored the belief on which the arithmetic depended. This is worth marking, because it is the same mechanism the whole series keeps returning to: a financial system runs on confidence, confidence is self-fulfilling in both directions, and the single most consequential act of the new administration’s first month was to reverse the direction of a belief.

With the banks stabilized, Roosevelt turned to the price level, and here the story returns to the bedroom and the soft-boiled egg. The deflation was still doing its work, still grinding debtors under the rising real weight of what they owed, and the President had come to believe — with Warren whispering the theory and the farm bloc roaring for it — that the way to reverse falling prices was to reduce the gold value of the dollar. In April of 1933 he took the country off the gold standard, freeing the dollar to fall. Through the autumn came the daily gold-buying program, the prices set at the bedside, the twenty-one cents that was three times seven. Warren’s precise theory did not hold; the commodity prices refused to march in the lockstep his graphs had drawn. But the broad direction was sound, and the following January the Gold Reserve Act fixed the dollar at a new and lower value, thirty-five dollars to the ounce where it had been twenty and sixty-seven cents, a devaluation of the currency by more than half its former gold content. The reflation that followed — prices turning upward for the first time in four years — lifted the crushing real burden off every farmer and homeowner and shopkeeper who owed money, and it is among the more defensible things the administration did, whatever one thinks of the manner of its doing. That the manner involved a Cornell agronomist, a President’s lucky numbers, and a nineteen-seventeen enemy-trading statute pressed into service against no enemy at all is simply the character of the decade: the ends arrived at by improvisation, out of whatever lay in the drawer.

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The centerpiece of the first hundred days, and the boldest attempt of the whole decade to reach directly into the economy and reorganize it, was the National Industrial Recovery Act of June 1933, and to understand it one must understand the theory of the Depression it embodied, because that theory ran exactly opposite to the one most economists would later come to hold. The men who wrote the NIRA looked at the falling prices and the wage cuts and the desperate competition of firms undercutting one another to survive, and they saw a deflationary spiral: each business, cutting its prices and wages to stay alive, drove down the prices and wages of all the others, and the whole economy chased itself downward into the pit. The cure, as they saw it, was to stop the cutting. Fix prices at a floor. Fix wages at a floor. Stop the ruinous competition by agreement, industry by industry, so that no firm could gain by underselling and dragging the rest down with it.

The vehicle was the code of fair competition. Each industry — steel, coal, cotton textiles, and in the end some five hundred trades down to the dog-food makers and the burlesque theaters — would draw up a code, negotiated among its firms and blessed by the government, setting minimum prices, minimum wages, maximum hours, and rules of conduct. In exchange, and this is the part that would echo for decades, Section 7(a) of the Act guaranteed workers the right to organize and bargain collectively, planting the seed of the great labor upheaval to come. The whole apparatus was run by the National Recovery Administration, and the NRA was run by Hugh Johnson, a retired cavalry general with a red face, a profane tongue, a fondness for drink, and a gift for showmanship that the sober work of code-drafting could hardly contain. Johnson gave the program its emblem, a blue eagle clutching a gear and a bundle of lightning bolts, and businesses that signed their codes displayed the Blue Eagle in their windows and stamped it on their goods, and Johnson toured the country whipping up parades and rallies — a quarter of a million people marched down Fifth Avenue behind the Blue Eagle in September of 1933 — to shame the holdouts into compliance. It was industrial policy conducted as a revival meeting.

And a revival meeting has a theology, and the theology of the Blue Eagle campaign is the part of the NRA that reads most strangely to American eyes, then and now, because it borrowed its spirit from the political movement then rising across the Atlantic. The whole apparatus rested on the subordination of the individual to the group and of the group to the nation, and it made that subordination a patriotic duty rather than a mere convenience. The emblem carried the motto “We Do Our Part,” and the we was the point: the firm that lowered a price or lengthened an hour on its own initiative was no longer a competitor exercising his liberty but a slacker breaking ranks, and the campaign said so in as many words. Consumers were enlisted as enforcers, urged to buy only from merchants who flew the eagle and to shun those who did not, so that the pressure to conform came not only from Washington but from one’s own neighbors turning at the shop door. Johnson supplied the martial language to match. He warned that those who trifled with the bird would get “a sock right on the nose,” that noncompliance was a kind of desertion, and he made no secret of where he had found his model. He carried about with him, and pressed upon the Secretary of Labor, a pro-Mussolini tract called The Corporate State, and when Roosevelt eased him out in 1934 he closed his farewell by invoking what he called the “shining name” of Mussolini — an embarrassment to the administration precisely because it named out loud the resemblance everyone had noticed. The resemblance was real. The corporatism then ascendant in Italy proposed exactly this: industry organized into national bodies, competition replaced by coordination, the individual firm and the individual worker folded into a disciplined whole in the name of the nation. A startling number of New Dealers, casting about for a model of a modern state that could master a modern economy, found something to admire in it, in the years before the movement showed the world what else it was. This is the environment pressing on the tradition in its starkest form. Europe had produced a model of economic order that seemed, in 1933, to work — decisive, coordinated, national — and America, in its emergency, reached toward it. What pushed back was the oldest thing in the American grain, the individualism the codes were trampling: the shopkeeper who did not want to be told his prices, the manufacturer who resented the eagle in his window, the citizen who found the marching and the pledging and the neighborly enforcement distasteful in a way he could not always articulate. The reach toward the corporate state was genuine, and the recoil from it was genuine, and the recoil won.

The paradox at the heart of it is the one worth carrying away. For forty years the United States had made it a crime, under the Sherman Antitrust Act, for competitors to meet and fix prices and divide markets; the whole thrust of the progressive era, described in the earlier lectures, had been to break up combinations and restore competition. The NRA suspended that principle and inverted it. The government now summoned the firms of each industry into a room and required them to do the very thing the antitrust laws forbade — to agree on prices and carve up the terms of competition — and blessed the result with a federal eagle. The cartels the trustbusters had spent a generation breaking, the New Dealers now built with their own hands, on the theory that organized industry would stop the deflation that disorganized industry could not. Whether it worked is a question later economists have answered harshly. The argument advanced most forcefully by Harold Cole and Lee Ohanian holds that the NRA’s price and wage floors did precisely what floors do — held prices and wages above the level at which markets would have cleared — and thereby slowed the recovery they were meant to speed, keeping output lower and men idler than a freer adjustment would have. The codes raised the cost of hiring at the moment the country most needed hiring to be cheap. The Supreme Court settled the matter in May of 1935, in a case brought against a kosher poultry firm in Brooklyn, the Schechter brothers, ruling the whole Act unconstitutional as a delegation of legislative power and an overreach of the commerce authority. The Blue Eagle came down from the windows. And the recovery, freed of the codes, did not falter; it continued, and in the two years after Schechter it ran faster than in the two years before, which is a fact the NRA’s defenders have had to reckon with ever since.

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Now to the hardest problem in the decade’s policy, and the one where honest uncertainty is the only defensible posture, because the men who have studied it hardest disagree, and the evidence pulls in more than one direction. The recovery described in the last lecture had, by the early months of 1937, carried the physical output of the country back to and past its 1929 levels. And then, beginning in the middle of 1937, the economy fell off a cliff — industrial production down by a third in twelve months, unemployment leaping from around fourteen percent back toward nineteen, the sharpest single-year collapse of the entire Depression save the descent itself. It happened in the fifth year of a recovery, with no bank panic and no crash to point to, and its causes have been argued ever since. The temptation is to reach for the fiscal and monetary tightening that preceded it, and there was tightening, of several kinds at once. The question is whether the tightening was the sort that could have done this, and the answer, on close inspection, is more interesting than a simple yes.

Take first the monetary side, and take with it the natural question about the discount rate, because the answer overturns the premise in an illuminating way. The instinct is to look for a rise in the Federal Reserve’s discount rate — the classic lever of a central bank slamming on the brakes — and to trace it outward into the cost of borrowing across the economy. But the Fed did not raise the discount rate in 1936 or 1937. The New York rate sat at one and a half percent, low and unmoving, and when the slump arrived in the autumn of 1937 the regional Reserve banks were cutting the rate, not raising it — San Francisco went down from two percent to one and a half that September. The monetary tightening of those years ran through two other channels entirely. The first was the doubling of reserve requirements, in three steps between August 1936 and May 1937, the Fed’s response to the mountain of excess reserves the banks were sitting on, which the Fed feared might one day fuel an inflation. The second, and in the judgment of a growing number of scholars the more powerful, was the Treasury’s decision, beginning in December 1936, to “sterilize” the gold flowing in from a frightened Europe — to hold the incoming gold aside instead of letting it swell the money supply as it normally would. Reserve requirements doubled and gold sterilized: quantity tools, both of them, working on the volume of money and reserves, and neither of them a move in the price of Fed credit.

So the transmission has to be looked for in the quantity channel, and looking there turns up something that points straight at the fragility. The cost of safe capital barely moved. The yield on the highest-grade corporate bonds, the triple-A names, sat at roughly three and a quarter percent through 1937 and drifted slightly down into 1938. Mortgage rates likewise were on a gentle downward path through the late thirties, eased by the new federal housing institutions — the Home Owners’ Loan Corporation, the FHA, the insurance of savings-and-loan deposits — and were not driven upward by any tightening. If the discount rate did not rise, and the safe long rate did not rise, and mortgage rates did not rise, then the ordinary picture of a central bank choking off credit by making money dearer simply does not fit. Something else happened, and it shows up unmistakably in one number: the yield on medium-grade corporate bonds, the Baa names — the ordinary sound companies out of which a growing economy is built — leapt from around five percent in early 1937 to nearly seven percent by the spring of 1938. The spread between what the safest borrower paid and what the merely-sound borrower paid blew out from about two percentage points to more than three and a half. The safe borrower’s cost held steady; the marginal borrower’s cost exploded. This was not a general rise in interest rates. It was a collapse in the market’s willingness to bear risk, and that is a different animal, and it is the signature of a financial system that had become frightened.

Which brings us to the deeper question: why was the financial system so fragile in 1937 that a tightening this modest — reserve requirements that several careful studies find were not even binding on most banks, a fiscal swing toward balance, a new payroll tax — could tip it into the second-worst collapse of the decade? The answer is that the fragility was the pre-existing condition, and the tightening merely struck it. Several things had loaded the spring. The stock market had roughly quadrupled from its 1932 low, the industrial average reaching near 194 in the early spring of 1937, and a market that has run up that fast on a recovery not yet complete is a nervous market, primed to fall. A tax on undistributed corporate profits, enacted in 1936, had been penalizing firms for retaining earnings — pushing them to pay profits out as dividends rather than build the balance-sheet cushions and internal funds from which a firm finances its own investment — so that American business entered 1937 thinner and more exposed than it looked. Labor had erupted: the wave of sit-down strikes that began at General Motors in Flint over the winter of 1936–37, the Supreme Court’s validation of the Wagner Act in the spring, the violent Little Steel strike and the killing of ten marchers by police outside a Chicago plant on Memorial Day of 1937 — all of it drove wage costs up sharply and abruptly and told every employer that the terms of doing business had changed under him. Over the whole of it hung a cloud of political uncertainty: the President had spent his 1936 campaign denouncing the “economic royalists,” had opened 1937 with an audacious plan to pack the Supreme Court with additional justices, and had made no secret of his hostility to the men who ran large enterprises — so that a businessman weighing whether to build a plant in 1937 had to weigh, along with the ordinary risks, the possibility that the government itself had turned against enterprise as such. And beneath all of it lay the deepest fragility of all, the one that ties this lecture back to the last: the banks themselves were scarred. Having lived through 1930 to 1933, having learned that the Fed would not necessarily save them, the banks were holding those great excess reserves precisely because they no longer trusted the world, and when the Fed doubled their required reserves, many of them responded not by running down the excess but by rebuilding it — hoarding still more, lending still less — to protect the cushion that had become their only security. The mechanical requirement was small; the behavioral response to it, in a banking system that had been taught fear, was not.

So the honest verdict on 1937–38, the one to carry out of this room, is that no single lever explains it, and that the search for the one decisive tightening is probably a mistake. The mechanical channels were weak: the discount rate never moved, the safe rates never rose, the reserve requirements may not have bound. What did the damage was the collision of a real but modest withdrawal of support — sterilized gold, higher reserves, a budget swinging toward balance, a fresh payroll tax, the end of the veterans’ bonus — with a financial system, a labor market, and a business class all made brittle by the run-up, the taxes, the strikes, and the political weather. The tightening was the blow; the fragility was why the patient, who should have shrugged it off, instead fell down. And the risk premium that exploded while safe rates held still is the fever chart of that fragility, visible in the numbers to anyone who separates the price of safety from the price of risk. By the spring of 1938 the administration reversed itself — new spending requested, the reserve requirements rolled partly back, the gold desterilized — and the economy found its bottom in the middle of that year and climbed again, as the previous lecture recounted, though it did not close the gap until the war.

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The relapse of 1937 broke something in the administration’s thinking, and the break produced the decade’s final and sharpest reversal, the one that reveals how far the search for a lever had traveled from where it began. Confronted with a collapse he had not expected and could not immediately explain, Roosevelt reached, in the spring of 1938, for a diagnosis ready to hand in the older progressive tradition: the trouble was monopoly. Concentrated industry, he now argued, had used its power to hold prices rigid and administer the market for its own benefit, choking off the competition and the investment on which recovery depended. In April of 1938 he sent Congress a message calling for a great inquiry into the concentration of economic power, and the inquiry took shape as the Temporary National Economic Committee, the TNEC, which spent the next three years compiling the most exhaustive anatomy of American industry ever assembled.

The change of front is worth stating baldly, because it is nearly vertiginous. In 1933 the same administration had suspended the antitrust laws and marched a quarter million people down Fifth Avenue to celebrate the organization of industry into government-blessed cartels, on the theory that concentration would cure the Depression. In 1938 it blamed concentration for the Depression’s return and set out to break it. The lever that had been pushed one way was now hauled back the other, and the men pushing had not changed, only their theory of which direction the lever moved the machine.

To prosecute the new campaign Roosevelt installed at the head of the Justice Department’s Antitrust Division a Yale law professor named Thurman Arnold, and Arnold is one of the genuine curiosities of the period, because he did not really believe in what he had been hired to do, and said as much in print. He had written a book, The Folklore of Capitalism, arguing that the antitrust laws were largely ceremonial — a set of soothing rituals by which Americans reassured themselves that they were fighting the trusts while the trusts went on growing, the prosecutions functioning as theater rather than remedy. And then this cheerful cynic about antitrust took over the Antitrust Division and prosecuted more cases than all his predecessors combined, expanding the division from a few dozen lawyers to hundreds and filing suit against whole industries at once, on the theory that if the ritual was going to be performed it might as well be performed in earnest and made to bite. Whether the campaign against bigness accomplished much for recovery is doubtful; the recovery that mattered, when it came, came from war orders and not from trustbusting. But the campaign matters for what it shows, which is a government that had tried organizing industry and tried breaking it, had tried high wages and gold devaluation and cartels and antitrust, and was, at the end of the decade, still searching.

The most honest word on the whole effort was spoken not by a critic but by the administration’s own Treasury Secretary, the neighbor from the bedroom, Henry Morgenthau, testifying before the House Ways and Means Committee in 1939, in the tenth year of the Depression and the sixth of the New Deal. The government had spent, he said, and spent more than it had ever spent, and it did not work — the unemployment was as high as when they had started, and an enormous debt had been piled up besides. It was the confession of a fiscal conservative who had watched a decade of improvisation from the inside and found, at the end of it, that the lever had not been located. He was not quite right — the spending had done more than he allowed, and the deep reason it had not done enough is a matter still argued — but the despair in it was earned, and it is a truer note to end on than any triumph.

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Set the improvisations end to end and a shape emerges, though it is a shape without a clean moral. A president of unmatched qualifications met the slump with voluntary persuasion and a plea to hold wages up, and the plea helped turn the fall in prices into a rise in unemployment. A Congress walled the country off from the world at the moment the world was walling itself off in turn, and the walls made every nation poorer together. The constitutional calendar left the government headless for four months while its banks died, and the country amended its fundamental law so that it could never happen again. A new President stopped the bank panic in a week with an enemy-trading statute and a fireside voice, reversed the deflation with a devaluation set partly by lucky numbers, organized industry into cartels to stop the price-cutting and then, when a relapse came, broke the cartels and prosecuted the bigness he had lately blessed. Through all of it ran the search for a lever — a mechanism by which the federal government could reach into a national economy and move it — pursued by men who did not know whether the lever existed, drawing their tools from a drawer that a country of limited government had never stocked for this purpose.

Some of what they tried helped. The bank holiday and the fireside chat arrested a genuine panic. The devaluation lifted a genuine burden off debtors. The deposit insurance enacted in 1933 ended, for two generations, the bank runs that had defined American finance for a century, which is no small monument. Some of what they tried worked at cross-purposes with the rest, the cartels holding wages and prices above the clearing level while the spending programs tried to lift demand toward it. And the instrument that finally closed the gap was not located by any of this searching; it was stumbled into, and confirmed only when a world war turned the federal government into a buyer without limit and a builder of plant on a scale no peacetime politics would have dared. The lesson the war seemed to teach — that vast public spending could banish unemployment — was learned by a generation of economists and carried forward into the postwar world as settled truth, though whether it was the right lesson, and whether the thing that worked in a war would work in a peace, are questions this series is not yet done with.

A Whig telling of this decade, in which each intervention was a rung on the ladder of an enlightened state learning to manage the economy, cannot survive contact with the reversals — with a government that cartelized in 1933 and trustbusted in 1938, that raised real wages into a depression and taxed the retained earnings out of the firms it needed to invest. A reactionary telling, in which the whole New Deal was a betrayal of the founding and a strangling of a recovery that would otherwise have come, cannot survive contact with the panic that the fireside voice actually stopped, or the debtors the devaluation actually saved, or the runs that deposit insurance actually ended. What survives contact with the evidence is harder and less satisfying than either: a nation without the tools or the theory for the task that had fallen on it, improvising under pressure, getting some things right and some things exactly backward, and often unable to tell in the moment which was which. The government reaching into the economy was itself the great adaptation of the decade, and the country is arguing about that adaptation still, because the reach never afterward withdrew.

Return, at the last, to the bedroom and the soft-boiled egg, and to the professor from Cornell reading the morning’s price off a theory that would not hold, and to the President raising it twenty-one cents because three times seven was lucky, and to Morgenthau going home to write that the public would be frightened if it knew. There is something to be frightened of in that scene, and something to be moved by. The men in that room were reaching, with the crude and playful instruments they had, into the suffering of a whole country, trying to lift it by main force out of a pit no one had known how to climb, at the far edge of what a government of that tradition had ever presumed to do. They did not find the lever.

[ END OF LECTURE ]

End of Lecture 3.3

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