Posts Tagged ‘FDR’

Part 6: Slouching Through the Great Depression

December 1, 2008

Chapter Five
“Slouching Through the Depression”

Depression-era tax policies had the unintended consequence of creating a “risk-less economy.”

Read Part 1, Read Part 2, Read Part 3, Read Part 4, Read Part 5

In his 1933 inauguration speech, Franklin Delano Roosevelt famously told the nation, “Let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

Thanks to Roosevelt’s bold and firm leadership, the United States was no longer in fear of dissolving into revolution or anarchy. But although unemployment declined and the economy advanced steadily throughout Roosevelt’s first two terms, the New Deal failed to completely pull the United States out of the depression.

The median joblessness rate during the New Deal was 17.2 percent, and until the United States entered the war, it never fell below 14 percent. The country was still in the grip of fear, but it was of a different sort. It was a profound fear to take economic risks.

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The fact is, the crash of 1929 inflicted deep scars on the psyche of the nation—scars that would not heal until after the war. If Americans were afraid to deposit money in a bank, they were surely in no mood to invest in securities or any other venture that wasn’t as solid as Manhattan bedrock.

Despite all the positives of the New Deal, and there were many, Depression-era tax policies had the unintended consequence of creating a “risk-less economy.” A string of tax hikes and new taxes extinguished the nation’s sparks of innovation.

On top of the Revenue Act of 1932—one of the largest tax increases in American history, which doubled the estate tax, increased corporate taxes by almost 15 percent, and raised taxes on the highest incomes from 25 percent to 63 percent—the Revenue Act of 1935 raised new taxes on higher income levels, corporations, and estates. The Revenue Act of 1937 taxed short-term capital gains as ordinary income. And in 1936, Roosevelt added a higher top rate of 79 percent on individual income greater than $5 million—a rate that was increased again in 1939.

By 1937, the undistributed profits surtax severely restricted the ability of small companies to build up their capital out of earnings, and the large surtax on individual incomes discouraged rich people from investing in new companies.

Great Depression

At the 1936 Investment Bankers Association (IBA) conference, MIT president Karl T. Compton warned that the new surtax illustrated “how government regulation has been directed almost entirely at the curbing of exploitation and has generally ignored and sometimes even penalized attempts toward technical progress.”

The result was that more and more funds flowed into super-conservative investment trusts, and to insurance companies and pension funds. By the 1938 IBA convention, the financial community began to express deep concern about the nation’s atrophied capital markets.

“If investors throughout the land, large and small, refrain from purchasing unseasoned securities of a young industry and refuse to take a business man’s risk, where will new industries obtain needed capital, and would not such a development slow down the economic progress of the country?” asked Dr. Marcus Nadler, a New York University finance professor.

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Part 4: Slouching Through the Great Depression

November 26, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2, Read Part 3

Doriot ended 1933 by firing another salvo—this time at his homeland. Like many immigrants, Doriot maintained a love-hate relationship with his home country. But Doriot’s feelings were more extreme than those of most immigrants.

“Doriot in many ways was the most schizophrenic Frenchman I’ve ever met,” says colleague and friend James F. Morgan. “He would go back and forth for this admiration for French wine and cuisine and the French language. But the French capacity to make very simple things complicated drove him nuts.”

And now, for the first time, Doriot publicly expressed his disgust with France. Throughout the year, Doriot had been contributing a quarterly column for a French magazine called La Revue des Vivants, the Review of the Living Ones. In his December column, Doriot attacked the French government when it refused to pay a $20 million interest payment on her wartime debt to America.

Calling his country a “frivolous nation,” Doriot was outraged that France would not pay this relatively small sum to a country who had come to its aid when it needed it most. “Without exaggeration,” he thundered, “one can safely say that during the last four or five years France has done everything she could to have America become disgusted with her.”

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In the beginning of 1934, Edna met a gentleman who owned a very nice duplex apartment for rent on the top two floors of 101 Chestnut Street in Boston. Although Edna declined at first, explaining that it was too expensive, the gentleman clearly wanted them to take the apartment, lowering the rent so that it was more affordable. The Doriots soon moved in, and Edna picked up a few new items to furnish their new home.

The couple liked the apartment but the new home did not brighten Georges’s spirits very much. For much of that year, Doriot was in a “rather disinterested mood,” as he described it. “I have been in Boston trying to act as a nice teacher not burdened with any new ideas,” Doriot confided in Strauss. “There has been no excitement up here, and I am looking for excitement.” However, as the mid-term elections of 1934 heated up later that year, Doriot’s life became entangled in an unusually public affair, giving him more excitement than he bargained for.

New Deal

In a speech he gave in Philadelphia on October 18, Doriot denounced the very basis of the New Deal. “The New Deal will go down in history as one thing that has done more harm to the morals of the nation,” said Doriot. “The idea that all men are born equal and that it is a desirable thing for everybody to be interested in government is wrong and fantastic, and sooner or later we must come to the conclusion that those who pay the taxes have more right to govern than those who don’t.”

These few sentences are probably the dumbest that Doriot ever uttered, and democratic politicians running for office picked up the remarks like they were a gift from the political gods. In a rare lapse of judgment, Doriot had crossed the line from iconoclastic to idiotic. In a speech in Boston on November 2 before a throng of supporters, James M. Curley, a three-term mayor of Boston who was running for governor of Massachusetts, used Doriot’s remarks on the New Deal to criticize Harvard University.

Looking over his throng of supporters, Curley quoted Doriot’s comments on the New Deal and then launched his attack.

“This is a most unusual statement for a supposedly educated man and coming from the assistant dean of Harvard University Graduate School does not reflect credibility upon this famous institution of learning. The dean overlooks the fact that the New Deal has been the most potent contributing factor for a higher moral order in America that has taken place in the past 10 generations, in that it has taken children out of industry, permitting them to develop mentally and physically until such time as they are able in some measure to begin life’s battle. . . If a knowledge of hygiene and a respect for lawfully constituted authority which is the cornerstone of our form of government is to be classified as immoral then Professor Doriot is guilty of the most stupid statement that a supposedly intellectual man can make.”

Curley won the election, as did many other Democrats. And Doriot learned his lesson. Never again would he attack such a prominent political figure as FDR in such a public way. Instead of lashing out, Doriot would apply his influence and charm behind the scenes.

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Forget the First 100 Days; It’s the 90-Day Interregnum That Matters

November 23, 2008

In the agonizing four-month interval between the November 1932 election and the inauguration of President elect Franklin Roosevelt in March 1933, the American banking system shut down completely.

New York Times columnist Paul Krugman wrote a great column about this issue, in which he wrote that “the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.”

Outgoing President Herbert Hoover repeatedly beseeched FDR to do something, anything, to calm the public. FDR demurred over and over again. Fear and panic filled the void.

[FDR on inauguration day: from the Life archive on Google.]

Back in 1933, Americans across the country, realizing that Washington was stuck in a state of deadening paralysis, “scurried to their banks, queued up with bags and satchels, and carted away their deposits in currency or gold,” wrote historian David M. Kennedy in his Pulitzer Prize winning book, Freedom From Fear. To stem the panic, states declared banking holidays. By inauguration day, government decrees had shut down every bank in 32 states.

Today, I don’t think the banking system is as bad off as it was in 1933, though it does appear to be weakening. But we do face a whole new raft of risks.

One, we are still facing a liquidity crisis. Without a federal stimulus packages or some sign that the government is willing to pump up the economy, credit markets could remain paralyzed and banks could remain unwilling to lend.

Two, we are still facing a crisis of confidence. Deflationary powers could strengthen and wipe out even more jobs. Without strong government action over the next 90 days, the stock market is likely to continue to drop, zapping wealth and making consumers less likely to spend, forcing more companies into restructuring or bankruptcy.

Three, we are facing a car crisis. Washington needs to apply its power to force a restructuring of the automobile industry–and avoid a chaotic flameout could send unemployment into near–Depression era levels.

The question is whether or not Detroit–a crucial industry and national security asset–needs to be put through bankruptcy in order to do so. The emerging consensus seems to be, yes, a pre-packaged and orderly bankruptcy would be the best course of action, and I tend to agree with that. Congress did the right thing by denying Detroit a bail-out. Now, it needs to help revamp Detroit and create an industry that is truly competitive. But acting now is crucial. This week, two of the three CEOs of U.S. car companies basically admitted they are teetering on the edge of bankruptcy.

Against this darkening outlook, it comes as a welcome relief to see Barack Obama accelerating his transition plans and proposing a more aggressive stimulus package. It shows that he is not following one lesson of FDR: stiffing the American public for political gain. Hardly anyone remembers that FDR put politics over the American people before he took over office but his lack of action caused a lot of pain for a lot of people.

As Kennedy writes, one of FDR’s advisors once said that FDR “either did not realize how serious the situation was or . . . preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation.”

Let’s hope the Republicans work with Obama and the Democrats to craft a package that can be signed into law the day he takes over from the Bush Administration. (Or maybe Congress could pass some smaller mini-stimulus package ahead of a big bold Obama package.)

Obama campaigned on the premise that he would put the people before politics. That solving America’s problems was more important than scoring ideological or political points. This is his first big test and chance to prove that he was not blowing smoke.