The Forgotten Man by Amity Shlaes

Published by HarperCollins

Reviewed by Leigh Kimmel

In school we learn that the Great Depression threw the United States into a deep turmoil, a slough of despond from which individuals could not pull themselves by their own efforts. The Administration of the sitting President, Herbert Hoover, stuck to traditional methods that amounted to doing nothing and letting the market correct itself, but they only led to further downward spiraling as people lost confidence in the monetary system. Runs on banks became common as rumors spread that they were in trouble, leading to the very thing people were trying to protect themselves against. Only when Franklin D. Roosevelt was elected and instituted the sweeping set of programs known as the New Deal did the tide begin to turn, and FDR's strong leadership carried the nation through the crisis successfully and prepared us to be the Arsenal of Democracy in the battle against Naziism.

In this history Amity Shlaes takes a contrarian view of the role of FDR and the New Deal in the recovery. Far from being the firm hand upon the wheel of the ship of state, FDR is revealed to be an inveterate experimenter who was often trying everything he could think of in hopes that something would work. And far from pulling us out of the Depression, many of the programs of the New Deal may well have delayed the recovery by interfering in the very processes that were just beginning to counteract the tailspin into which the economy had gone as a result of the collapse of the stock bubble of the second half of the Twenties.

But worst of all, the traditional history of the Great Depression and the New Deal may have given us a legacy of inaccurate ideas about both history and economics. In particular, we are left with the impression that only government intervention can rescue us from major disasters, and that government spending and economic intervention can actually be a positive good, rather than a necessary evil.

In order to give the reader a solid footing of context in which to understand the problems of the New Deal, Shlaes begins not with Roosevelt's election to the Presidency and the Hundred Days, or even with the disastrous events of October of 1929, but in 1927 when things were still booming. It was also the year in which the Mississippi River flooded at levels that would not be seen again until the 1993 floods. At that time there were relatively few levees or other flood control systems to hold back the water as the river poured over its banks. In those days of Jim Crow, much of the bottomland was occupied by poor African American sharecroppers, which meant that their plight as a result of the flooding was seen only in terms of the labor power they represented to their landlords.

Herbert Hoover was not a complete unknown when he took charge of the Federal disaster relief effort in the lower Mississippi River basin. A respected mining engineer, he had held responsible posts during World War I, mostly related to getting and keeping the economy on a wartime footing and relief efforts for people in Europe who had lost their homes and livelihoods as a result of the conflict. But it was Hoover's role in the government's response to the Mississippi flood that clinched his victory in the 1928 election and placed him in the White House when the stock bubble inevitably burst and the Crash came. The apparent success of government relief also left many people with a sense that some crises were simply so big that only a centrally managed relief effort could respond adequately to them, and only the federal government had the reach to fill that role.

In that same year, a group of liberal American thinkers took a trip to the Soviet Union to see a working socialist state. This was the time when Lenin's New Economic Policy (a compromise which permitted small-scale private enterprise while reserving heavy industry and distribution systems to the Soviet state) was being dismantled by Stalin in favor of a doctrinaire approach. The first Five Year Plan for the industrialization of the Soviet economy was being set forth, although it would not actually take force until the following year. As a result, the Soviet Union was still riding on the energy of the Twenties, and had not yet been caught by the contradictions of forced-draft industrialization or the catastrophe of forced collectivization of agriculture. The cognitive dissonances that would drive the Great Terror were still a distant cloud upon the horizon, the signs perceptible only in retrospect. As a result, the American visitors got the impression of grand successes, and many of them, even ones who were not active socialists, returned glowing reports of the successes of collective effort.

Because of the way history is taught, many people have the impression that the Crash was a single sudden, catastrophic event. One day everything was prosperous, and the next everything fell apart and the entire nation was flung into destitution. In fact the Crash was a process rather than a single event, as Shlaes chronicles with an expert hand. At first the bursting of the stock bubble seemed to be a temporary setback, and the stock market actually rallied for a few days afterward. But it was a rally that could not last, because there were still no fundamentals under the prices at which stocks were trading. Over the next several months there would be several more sudden tumbles as margin calls led to flurries of selling.

In addition, the effects of the stock market crash took time to ripple outward to the general economy. News travelled more slowly in those days. Although radio networks could transmit the news instantaneously from coast to coast, there was not yet a 24/7 news cycle of the sort fostered by CNN, MSNBC and FoxNews. People might not hear about events until the news was broadcast in the evening, and even then it was generally a brief remark rather than anything comparable to the talking-head interviews with experts that are such a staple of modern television news channels.

But when the stock market crash led to the failure of overextended banks, the effects began to spread rapidly. The first bank failures caught their depositors by surprise, and many of them did not even learn that their funds were in danger until the bank's cash reserves were already wiped out and it had closed its doors. As word got out, people became determined that they would not be caught flat-footed. Thus any rumor that a bank might be in trouble was enough to send depositors streaming in to pull their money, which virtually guaranteed that the bank would fail, for the simple reason that no bank ever holds enough cash on hand to liquidate all its deposits at once. Banks are required to hold a certain percentage of cash in reserve, known as the fractional reserve, against the number of withdrawals that could reasonably be expected to occur in a short period of time. The rest is lent out at interest, which is the mechanism by which banks make the money that enables them to operate as a business.

The misery at the individual level which resulted from this sudden, catastrophic contraction of America's markets is covered relatively briefly, for the simple reason that it is so well known. Shlaes chooses a few vivid images, such as the young man who took his own life so that there would be more food left for the rest of the family, to stand for the entire constellation of horrors that befell a people who had previously been prosperous. Instead, Shlaes focuses upon what came after Roosevelt came into office and set about his alphabet soup of programs to get the economy back on its feet.

Here we see Shlaes' central thesis, that many of the programs of the New Deal actually did more harm than good. Because many of the policies of the National Recovery Act and associated legislation were focused upon the practices of large corporations, they were often out of sync with the needs of the myriad small businesses which made up a large part of many sectors of the economy. One of the most vivid examples of this is the story of the Schechters, a small Jewish butcher shop which specialized in kosher slaughter of individual chickens for their customers. According to the traditions of their subculture, it was customary that a buyer be allowed to pick the specific chicken she wished to buy and have it slaughtered -- a practice that was forbidden by the NRA, which prohibited slaughterhouses from cherrypicking the animals to be slaughtered. As a result, the Schechter brothers had to fight their case before courts filled with Gentile judges who really didn't appreciate the importance of kashraut (the religious laws associated with distinguishing kosher food from traife) in the Jewish way of life.

Shlaes also touches upon the difficulties faced by American intellectuals who had been previously touting the Soviet Union as an example of the efficiency of central planning as that country began slipping into the nightmare of the Great Terror. Because it is significant primarily in the way in which it undermined the positions of American thinkers significant to the New Deal, Shlaes gives little time to discussing the underlying reasons of the Terror, and pretty much presupposes the traditional narrative by which it was the result of Stalin's deliberate and premeditated efforts to eliminate all potential opposition, rather than the moral panic theory of the inherent cognitive dissonances of Communism set forth by J. Arch Getty and Oleg Naumov in The Road to Terror. Of course it should be noted that most American thinkers at the time who did realize that enormous miscarriages of justice and resultant mass murder were taking place assumed that the perpetrators had to know that their victims were in fact innocent, so the failure is excusable (Getty and Naumov discovered the true course of events at the top levels of the Soviet hierarchy only through meticulous examination of working documents of the Communist Party in archives that were opened subsequent to the 1991 fall of the Soviet Union).

Shlaes concludes her book on the eve of America's involvement in World War II, as it becomes increasingly obvious that the United States will inevitably be drawn into the fighting in Europe and East Asia, and FDR is increasingly shifting the industrial might of the US to a wartime footing. To do so, he is forced to drop the positions that treat big business and finance as enemies to be compelled and has to work with them, ensuring them profits as they build war materiél.

This book is particularly relevant now, as the American economy continues to muddle along in the worst recession since the Great Depression. While the Great Depression was the result of rampant speculation in stocks, fueled by a system of buying on margin that allowed people to buy stocks they couldn't afford in hopes of making sufficient profit to pay off the loan and still make money, the current economic problems were the result of rampant speculation in housing which was the result of lending laws which were intended to help low-income buyers become homeowners but ended up being used by speculators to buy houses with the sole intent of selling them as their value appreciated, a practice known as flipping. And much as the New Deal may have actually hindered the recovery after the Crash, there are serious questions as to whether the various stimulus packages put forward by first the Bush Administration and then the Obama Administration have actually helped or harmed the economy.

Review posted October 10, 2010.

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