The depression of the 1930s was a worldwide event. In most economically advanced countries the fall in output and employment was the deepest and the most protracted in recorded history. In many of these countries the economic disaster also had profound political consequences, most prominently the rise to power of the Nazi Party in Germany, but also the ascendency of right-wing nationalists and fascists who soon enough made up the core of the Vichy regime in wartime France and likewise encouraged Britain’s flirtation with organized fascism. America—along with Germany one of the two countries hit hardest by the economic collapse—was no exception in this regard, although here political developments took a different course.

Nearly eight decades later, debate continues over the relative importance of the forces that combined to make what would otherwise have been an ordinary business downturn so deep and long-lasting. In the US most economists today assign the highest importance to systematic mistakes by policymakers at the Federal Reserve System—whose managers were still learning their way following the institution’s creation in 1913—together with the collapse of the banking system both here and abroad. If the Federal Reserve had eased monetary policy earlier and made funds more readily available to banks, the outcome would presumably have been different. Other foolish policies contributed as well—like raising tariffs to record levels, and raising tax rates to try to balance the government’s budget despite the economic decline. So too did the absence of deposit insurance, which allowed many families’ savings to be wiped out. Most economists see the stock market crash itself as more a symptom of the larger crisis than a cause.

Debate is even more intense on the broader questions of what the depression proved about the US economy and society, and what implications therefore follow for public policy. The chief economic lesson drawn at the time was to reject the long-standing presumption that competitive private markets would naturally and promptly right the economy after any departure from stable expansion. Instead, it became clear that downturns, if left unchecked, might persist over long periods and inflict widespread losses of output, profits, and jobs. (How long would it have taken to achieve a full recovery if World War II had not occurred?) In a world in which more and more people worked for wages, often in large companies, rather than running their own businesses or conducting independent trades, a significant part of the citizenry was plainly unable to protect themselves against losses and hardships resulting from problems in the economy at large for which they bore no individual responsibility. Hence the presumption that a man’s material success in life would reflect his moral worth—the core belief underpinning what Max Weber had identified as the “Protestant ethic”—likewise came into question.

With many citizens neither personally responsible for their economic hardships nor able to defend themselves individually, the depression naturally raised the further question of what governments could do to undertake that task for them. In most advanced Western countries the answer by the time the depression ended was that government intervention was necessary, and the consequences have been enormous. In the United States the direct legacies of the depression and the government’s reaction to it include Social Security, unemployment insurance, deposit insurance, securities market regulation, and disaster relief, to name just a few. But the real story was the change in American attitudes: a new and different sense of who was responsible for what. The resulting boundaries between public and private have been aggressively contested ever since.

Part of what initially made the depression seem so dramatic to some Americans was the contrast with the vigorous economic expansion of the late 1920s—with a stock market boom that became legendary in its own time, free-flowing whiskey and gin (notwithstanding Prohibition), and the “flapper” culture that accompanied both. In fact, however, the economic record since World War I ended had been decidedly mixed. A business recession had begun some months before the Armistice was signed, and it lasted into the spring of 1919. A new recession, this time deeper and more pervasive, began early the next year and lasted for a year and a half, until midsummer 1921. Two more downturns, each lasting somewhat more than a year, occurred in 1923–1924 and 1926–1927. In all, for fifty-two of the 132 months between August 1918 and August 1929 the US economy was contracting.

But the downturn that began in the summer of 1929 was different. Total economic production was nearly 9 percent lower in 1930 than in 1929—already a steeper drop than in any complete US business downturn on record—and the next three years saw successive further declines of 6, then 13, and finally another 1 percent. Industrial production, typically more volatile than service businesses, fell by more than half overall, and in some key industries far more. Steel production fell from 62 million tons to 15 million; iron ore extraction from 74 million tons to 10 million.


With fewer goods being made and sold, businesses needed (and could afford to pay) far fewer workers. Unemployment rose from less than 3 percent of the labor force in 1929 to nearly 23 percent in 1932. Without the income from the wages they missed, ordinary families could no longer afford to spend. Purchases of new automobiles, for example, fell from 4.5 million in 1929 to 1.1 million in 1933. Millions of families also faced either eviction for failing to pay their rents or foreclosure for defaulting on their mortgages. “Hoovervilles”—makeshift ramshackle villages thrown together for shelter by the homeless—became a familiar sight in urban parks and on the outskirts of most American cities. Overall, income per capita fell back to where it had stood fully thirty years before.

Even more troubling for the economy’s future, the sharp decline in the volume of goods most businesses were making and selling also meant that they had less reason to invest; and they had meager if any profits to finance whatever investment they needed. Investment in new factories and machinery fell from $11 billion in 1929 to $3 billion (in 1929 dollars) in 1933. Similarly, Americans in 1929 began construction on more than a half-million new houses; in 1933 the total was just 93,000.

March 1933 marked the bottom. Total production rose 11 percent in 1934, 9 percent in 1935, and then 13 percent in 1936—just enough to regain the level reached in 1929. But by then businesses in many industries had learned to make do with less labor, even if they now produced just as much. In 1936 the number of Americans with jobs in nonfarm businesses remained just 30 million, compared to nearly 33 million seven years earlier. Even with nearly 4 million citizens now on the roll as federal “emergency” workers, unemployment remained at 10 percent.

Output increased by a further 5 percent in 1937 as a whole, but the economy began to slip again by midyear and output was 3 percent lower in 1938. (Most economists attribute the decline to a premature tightening of fiscal and especially monetary policy; today’s image of Keynes’s influence notwithstanding, the US government was not yet committed to the idea of deficit spending, and Federal Reserve policymakers were still learning how the various instruments of monetary policy worked.) Despite fears that the depression had returned in earnest, this new downturn ended by mid-1938 and the resumed expansion was again rapid: 8 percent in 1939 and 9 percent in 1940. But job growth continued to lag and it was not until 1942, America’s first full year in World War II, that unemployment finally returned to the low level of 1929.

Meanwhile, the Roosevelt administration had transformed large parts of the American economy. Jobs programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA) directly provided work for eight million people. At one point or another, one American in five received some form of direct federal assistance through programs like the Federal Emergency Relief Administration. (Strikingly, despite all the joblessness and loss of income, the US infant mortality rate declined during the 1930s.) The Homeowners Loan Corporation and the Farm Credit Administration refinanced one fifth of all home mortgages and farm mortgages, respectively. The US Housing Authority provided low-income housing. The Agricultural Adjustment Administration provided farm price support. The Tennessee Valley Authority (TVA) brought electricity to large sections of the American South. And in one industry after another regulatory bodies set new constraints on how private business was to be run.

Amity Shlaes, in The Forgotten Man, tells the story of the depression and the government policy response it elicited in splendid detail, rich with events and personalities. She gives detailed accounts of Herbert Hoover’s experience in the mining industry before he entered politics, Franklin Roosevelt’s relations with the various members of his “brain trust,” and the debates among Roosevelt’s advisers over going off the gold standard. She recounts the spectacle of American towns printing their own money in an attempt to make up for the shortage of official US currency, the government’s inane lawsuit against Brooklyn’s Schechter brothers—kosher butchers—for selling two “sick chickens” (which went to the Supreme Court and ended with the Court declaring, in 1935, that the National Recovery Administration was unconstitutional), and the protracted struggles over rural electrification both among the TVA’s three directors and between them and Wendell Willkie’s electric utility company, Commonwealth and Southern. Lesser figures of the era like Rexford Tugwell, the agricultural economist and New Deal adviser, David Lilienthal, who directed the TVA, and Paul Douglas, an economist at the University of Chicago who later became a US senator, come across as colorful personalities. Many of Shlaes’s descriptions make genuinely delightful reading.

How to assess Roosevelt’s actions beginning in March 1933—and, in parallel, Hoover’s policies during the nearly four years of the downturn—has long posed a challenge to economists and historians hostile to government action. From that viewpoint, Hoover’s reluctance to undertake government initiatives should be seen as admirable. But didn’t it allow the downturn to become the depression? The economy recovered under Roosevelt; but the legacy of large-scale government remains anathema, both for the interference in the workings of private business and for the assumption of public responsibility for citizens’ personal welfare, whether in housing or old-age pensions.


Shlaes, a columnist for Bloomberg News and a former member of the editorial board of The Wall Street Journal, follows what has become standard conservative thinking in denying that Roosevelt’s programs had anything to do with the recovery. (The title, The Forgotten Man, was used in an essay by the nineteenth-century sociologist William Graham Sumner—in which he attacked progressives for, in Shlaes’s words, coercing “unwitting average citizens into funding dubious social projects”—but then used again by Roosevelt, with an altogether different meaning, during the depression.) Indeed, focusing on unemployment and the stock market rather than production and incomes, she mostly writes as if no recovery occurred at all. Her view of Hoover is more unusual (although it too owes something to earlier treatments). In her account, Hoover as president was an activist, to be lumped together with Roosevelt. His policies made the depression worse, but for the same reason that Roosevelt’s impeded the subsequent recovery: “From 1929 to 1940, from Hoover to Roosevelt, government intervention helped to make the Depression Great.” Both men stand equally condemned for their policies, and both are seen as having morally unattractive personalities.

Several problems prevent Shlaes’s argument from being fully credible. Most obvious is the continual refusal to acknowledge the scale and scope of the recovery that took place beginning in 1933 or, by some measures, as early as 1932. For example, compared to the low point in July 1932, US industrial production was 32 percent higher by December 1933, and it continued to rise by another 10 percent in 1934, 24 percent more in 1935, and yet a further 21 percent in 1936. Strangely, ignoring this resurgence, Shlaes claims that “after 1932, New Zealand, Japan, Greece, Romania, Chile, Denmark, Finland, and Sweden began seeing industrial production levels rise again—but not the United States.”

Shlaes likewise magnifies the 1937– 1938 recession compared to what happened between 1929 and 1933. True, total output was 3 percent lower in 1938 than 1937, and unemployment jumped from 9 to 12 percent. But according to Shlaes, “The first crash had seemed like a nightmare; this crash felt like a life in the dark.” In much the same way, she sees any stock price increases during the Roosevelt period as random fluctuations, while declines reflect investors’ sound judgment on bad policies and the poor economic prospects they portend. By contrast, during the 1920s the stock market boom reflected investors’ sensibly based confidence in the economy’s future under Coolidge’s policies.

A second problem surrounds Shlaes’s argument that New Deal policies depressed the incentive and ability of US businesses to innovate. In fact, there were large gains in American productivity during this period. According to Shlaes, outright interference with business under the National Recovery Administration (NRA) and countless other programs was a major impediment to efficient production and especially to innovation. To make matters worse, she writes, Roosevelt’s open spirit of experimentation with untried programs meant that he sometimes pursued simultaneous initiatives based on plainly conflicting ideas. For example, he favored easier monetary policy (to the extent that Federal Reserve officials knew how to do that) to expand the economy and reduce unemployment, while at the same time the NRA’s price and wage codes for many industries pushed up real wages, thereby making it more expensive for businesses to hire more workers. Such differences in policy produced widespread confusion and even fear, which further depressed business investment and innovation. “Roosevelt’s commitment to experimentation itself created fear,” she writes, and “Fear froze the economy.”

The chief difficulty with this line of argument is already implicit in the contrast between the rapid rate of recovery in the volume of production and the much slower recovery in the amount of labor used to produce it. Making more output with less labor input means increased productivity—precisely what efficient management and creative innovation are supposed to achieve. Indeed, recent research suggests that the 1930s may have been the decade with the greatest increase in the productivity of the US private sector during the twentieth century.

The economic historian Alexander Field, for example, has argued that the years between 1929 and 1941 were the most technologically progressive period on record in US history, with both private businesses and government contractors introducing many new technologies and practices.1 Field points to advances in chemical engineering, aeronautics, electrical machinery and equipment, electric power generation and distribution, transportation, communication, and civil engineering. He argues that many of the innovations nowadays commonly associated with World War II were already in widespread use before the war began. Empirical arguments of this kind are always subject to debate, and no doubt one can present challenges to Field’s conclusions. But such findings undercut Shlaes’s repeated claims that Roosevelt’s interference with business, and the “fear” that his willingness to experiment created, seriously dulled the abilities or incentives of business to seek efficiencies.

This point bears also on Shlaes’s characterization of the recovery as feeble. After falling from $11 billion in 1929 to $3.2 billion in 1933, US businesses’ investment in new productive facilities rose to $8.4 billion in 1937 (all in 1929 dollars). Similarly, Shlaes characterizes the downturn in 1937– 1938 as a period when business was sufficiently alarmed to go “on strike” rather than pursue new investments, thereby taking the entire economy down. Overall production did decline by 3 percent in 1938 and, as would be expected if the primary cause were a premature tightening of monetary policy, investment spending fell by much more: to only $6.1 billion in 1938. But again a recovery followed quickly, and by 1940 investment had passed the 1937 level. Would either rebound have been greater without Roosevelt’s policies? The case needs to be made, not simply assumed.

Shlaes also undercuts her substantive argument with her relentless personal denigration of Roosevelt. In contrast to steadfast figures like Andrew Mellon and Calvin Coolidge (not, however, Hoover), whose commitment to the private sector she describes as a reflection of “strength of character,” Roosevelt, in Shlaes’s view, only made decisions for political advantage, or revenge, or just “for the fun of it.” His policies, grounded in “hypocrisy” and “cynicism,” were “devastating.” His “playfulness” was “destructive.” His campaigns were “hate campaigns.” Never, in Shlaes’s account, did Roosevelt adopt a policy because he thought it good for the country. Indeed, the only positive adjective applied to Roosevelt here is “respectful”; but tellingly, what Roosevelt is respectful of, as a canny political pro, is the potential vote-getting appeal of his opponent Wendell Willkie in the 1940 election. In Shlaes’s imagining, using words she takes from Walt Whitman, Roosevelt’s inner thoughts display a megalomania worthy of Louis XIV. She writes: “‘Do I contradict myself?’ Roosevelt seemed to be asking…. ‘Very well then, I contradict myself. I am large, I contain multitudes.'” (Similarly, the “priggish” Hoover, with his “love of publicity,” “knew how to put on a political show” and “liked to jump in, and find a moral justification for doing so later.”)

Shlaes’s account of the depression experience seems unbalanced for two further reasons. Perhaps in order to present an upstanding public figure to serve as a foil for Roosevelt’s alleged fecklessness and even outright meanness, Shlaes recounts the story of Wendell Willkie’s life and business career as a running subplot throughout the book. One unanswered question is simply why Willkie—a midwestern lawyer who became president of the Commonwealth and Southern Corporation, a large electric utility holding company—was sufficiently interesting to merit such attention in a history of the depression. More importantly, including Willkie in this way forces Shlaes to put heavy emphasis on the public utility industry in which he worked, but without the analysis of the industry’s basic situation and structure that might have shown why this emphasis (as opposed to manufacturing, say, or construction) provides more general insights. At the end of the book Willkie fails to attract much popular support in the 1940 election, and so his large role in Shlaes’s drama remains puzzling.

By contrast, what is most prominently missing in Shlaes’s account is an examination of how international events and institutions help explain why what began as yet another business downturn became the depression, and why it was so difficult for many countries to recover. Early views of the depression in the United States, like those that emphasized the stock market crash, mostly treated the episode as if it were a result of forces within the US alone. But recent scholarship has emphasized that it was not a coincidence that so many economies suffered the same drastic experience simultaneously. Events abroad, like the failure of Austria’s Kreditanstalt (which set in motion the 1931 US banking crisis), and international institutions, like the gold standard, contributed in important ways to the unraveling of the economy both in the United States and in other countries. (Countries that left the gold standard sooner, like Great Britain, recovered sooner while those that stayed on gold longer, like France, had the most delayed recoveries.)

Although Shlaes begins her account with the detailed story of a visit to Russia by Rexford Tugwell, Paul Douglas, and other Americans in 1927, her purpose is more to highlight the curiosity of these men about communism under Stalin than to explore the effects of developments in other countries on the depression in the United States (and Russia, with its backward economy, remained peripheral in any case). By contrast, recent scholars like Barry Eichengreen and Ben Bernanke have shown that the depression in America was as deep and protracted as it was in part because of what happened abroad and the institutional arrangements that then linked together the world’s economies.2

Robert D. Leighninger Jr., in Long-Range Public Investment: The Forgotten Legacy of the New Deal, provides a view of the US government’s actions during the depression that is strikingly different from Shlaes’s. Like most economists today who look back on depression-era programs such as the CCC and the WPA, Shlaes assesses these activities by their effectiveness in putting unemployed people back to work. The only lasting creations of this period that she describes are private ones. Her admiring portrait of Andrew Mellon culminates in the remarkable generosity of his gift of money and paintings to establish what became the National Gallery of Art, and she gives a glowing account of the new marble building on Washington’s Mall. In her oddly laudatory account of Samuel Insull, the infamous utility company operator and stock manipulator, she repeatedly highlights the magnificent opera house he contributed to Chicago. Yet we get the impression that most employees on the payroll of the CCC and WPA did no more than rake leaves.

Leighninger instead catalogs what he calls the “long-term physical contributions” of these programs and others like them. They include hospitals, schools, auditoriums, museums, courthouses, city halls, fire stations, waterworks, parks, fairgrounds, farmers’ markets, and countless other facilities, many of which are still in use today. He not only describes many of these projects but supplements his written account with photographs (many that he took himself) of such well-known sites as Hoover Dam, San Francisco’s Cow Palace, Washington’s Reagan National Airport, and Houston’s City Hall, as well as lesser-known ones like San Antonio’s River Walk, Bandelier National Monument in New Mexico, the Mountain Theater on California’s Mount Tamalpais, and the Eighteenth Precinct police station in New York City. Especially in view of the tragic collapse in early August of the I-35W bridge in Minneapolis, first opened in 1967, it is all the more impressive that earlier, depression-era contributions to America’s transportation system like New York’s Triborough Bridge and the San Francisco Bay Bridge are still in place, carrying traffic every day.

As Leighninger explains, the idea that government should provide assistance to or even take the lead in such investments was hardly new at the time of the depression. Alexander Hamilton and then the Whigs of the early nineteenth century pushed for “internal improvements” like canals, turnpikes, and, soon after, railroads. These projects were intended to foster economic development westward across the vast continent that their advocates hoped to populate; and they had subsidiary benefits such as (in Hamilton’s mind in particular) the parallel development of America’s financial markets. But because such projects required large initial outlays while delivering returns only over time, private investors often needed government financing, or other assistance, to make them possible. Later on, others argued that such projects could be timed so as to even out prosperity and depression in what had become a rapidly developing but also highly volatile economy.

But Leighninger also acknowledges that these ideas were always subject to controversy, and even among people who favored them, the division of responsibility between the federal government and the states was a further subject of dispute. Jefferson, for example, with his devotion to the ideal of a yeoman agrarian society, vigorously opposed “internal improvements” and all they entailed. The Erie Canal, the most spectacularly successful of all such early projects—completed in 1825, it was key to the development of upstate New York and “the West”—was financed by the state of New York, not the US government. In addition to describing many of the projects undertaken during the depression, and explaining how they came to be, Long-Range Public Investment gives a short but valuable historical account of these and other debates about what American government should do along these lines and how it should do it.

Leighninger is also forthright in acknowledging that there has always been concern that such public projects will end up being useless pork rather than valuable investments. Whether this danger has become worse since the 1930s, and whether it is more severe in ordinary times than it was under the economic conditions that prevailed then, are important questions but they remain beyond the scope of his treatment. Recent examples include Alaska’s “bridge to nowhere”—a span from Ketchikan (population 14,500) to Gravina Island (population varying up to about fifty), that no one seemed to want to use. Congress denied funds for the bridge itself but, at the request of Representative Don Young (R-Alaska), appropriated discretionary funds that the state of Alaska can still use to build it. Such boondoggles certainly provide ammunition for these arguments. But even so, much of what the CCC, the WPA, and other depression-era programs left behind surely represents, in Leighninger’s words, “long-term investments in the United States.”

Shlaes is right to praise the vision and generosity of Andrew Mellon’s gallery, and to take it as a prime example of the truth that government initiative and support are not the only sources of lasting contributions to American society. Today Bill and Melinda Gates and Warren Buffett are demonstrating the same principle, albeit with a more international approach and even within the United States with more dispersed aims. In the same vein, another side story within Shlaes’s account of the depression is the founding of Alcoholics Anonymous and the development of its twelve-step program by Bill Wilson, a New York investment executive, and Bob Smith, a doctor in Akron, Ohio, both of whose lives and careers had been wrecked by their drinking. (Bill W. and Dr. Bob, a play by Stephen Bergman and Janet Surrey that was produced off Broadway in New York earlier this year, recounts this story in an especially powerful and inspiring way.)

But Leighninger is right as well to point to the lasting value of the public investments undertaken during the Roosevelt era. Shlaes’s view notwithstanding, most economists and historians believe that the jobs created under these programs, and the relief provided by others, not only alleviated the human suffering inflicted by the depression but helped advance the recovery. Even so, those were contributions of their time. Once the attack on Pearl Harbor triggered America’s entry into World War II, both production at full industrial capacity and full employment would have ensued anyway. But seven decades later millions of Americans, arguably most, continue to benefit from the physical legacy that some of these programs left behind.

An even more important part of the depression’s legacy, however, remains obscure in both books, as it does elsewhere: Why did America take such a different turn politically than so many of the other countries affected by the depression? To point to only the two economies most severely affected, why did Germany turn to the Nazis, to making war, and then the Holocaust, while America pursued such an altogether different path? A not uncommon view is that the Nazis’ success grew out of the economic turmoil and political chaos that Germany suffered in the years following World War I. But as late as 1928 the Nazi Party drew only 2.8 percent of the vote in German national elections; it was the depression that brought the Nazis to power. Even within American history considered on its own, the turn toward a greater measure of what Roosevelt called “social justice” stands in sharp contrast to the nation’s response to other episodes of economic stagnation, both before and after. Just why remains unclear. Such questions stand as challenges for future inquiries.

Meanwhile, the collapse of the market for “subprime” (in other words, not fully creditworthy) mortgages during the summer of 2007 disrupted financial markets more broadly, and even raised the prospect of a new economic downturn, both in the United States and elsewhere. In considering this situation, it is useful to recall the more clear-cut economic lessons that the depression imparted. We now have deposit insurance, and so destructive bank runs in the old-fashioned sense are unlikely if not implausible. We also have unemployment insurance, Social Security, and Temporary Assistance to Needy Families, and so widespread, dire poverty is not a prospect either.

Most central banks, certainly including the US Federal Reserve System, now understand the importance of monetary policy in arresting economic downturns. Few people nowadays call for tax increases when declining incomes cause government revenues to fall, or for spending cuts to balance the budget in those circumstances. We have the Federal Housing Administration—another New Deal agency—to which President Bush is looking to save American homeowners from foreclosures, and other government institutions that can also, if necessary, make credit available to private borrowers. The dream of eliminating the business cycle remains just that, but the confluence of institutional arrangements and government actions that led to the Great Depression will not occur again.

This Issue

November 8, 2007