America’s Greatest Depression

"This book gives a great description of what went on during the Great Depression. It is especially strong in describing the policy response. It was published in 1970, but is still the book I go to when I want to know about the actions that were taken in the New Deal. It gives you a sense of all the things that were done in the 1930s. One of the things you learn from Chandler is that President Roosevelt was trying everything. Back in the 1930s policymakers didn’t know as much about what monetary and fiscal policy could do. So they tried all sorts of things – housing policy, agricultural policy, various credit policies, even allowing industries to collude to raise prices. Now, many of these policies were not very successful. And the ones that were successful often were not pushed far enough. This is especially the case with fiscal policy. Chandler’s book reminds us of something that is often forgotten, that the fiscal response to the Great Depression just wasn’t very big. In fact, under President Hoover it actually went the wrong direction. When the deficit rose because tax revenues fell due to high unemployment, Hoover’s answer was a big tax increase – that was the Revenue Act of 1932. This misguided deliberate fiscal contraction was another reason why the economy kept going down and the Depression was as terrible as it was. Even under Roosevelt the fiscal expansion was modest. When we think about the New Deal, we tend to remember things like the WPA [Works Progress Administration relief programme], which built dams and bridges, and the Civilian Conservation Corps, which constructed so many buildings in our national parks. These programmes left enduring legacies, and so we often think of the fiscal policy response of the New Deal as being big and aggressive. But what Chandler points out, building on a classic paper by E Cary Brown, is that the fiscal response to the Great Depression was actually quite small – not nearly as large as the American Recovery and Reinvestment Act of 2009. Even when Roosevelt increased the Federal deficit in the mid-1930s, a move to budget surpluses by state and local governments meant that the net fiscal stimulus was much smaller. Brown’s famous conclusion, repeated in Chandler’s book, is: “Fiscal policy, then, seems to have been an unsuccessful recovery device in the ’thirties – not because it did not work, but because it was not tried.” Understanding the history of fiscal policy in the Great Depression certainly made me a strong advocate for a truly bold fiscal stimulus in early 2009. It also made me very aware of the counteracting role that troubled state and local governments can play. The Obama administration convinced Congress to use some of the funds in the Recovery Act to help state and local governments maintain services and not raise taxes. That turned out to be incredibly helpful. In retrospect, it would have been good if the Recovery Act had been even larger. But as it was, it was the largest countercyclical fiscal stimulus in American history – not just in dollar terms, but relative to the size of the economy. As we’ve gotten more evidence about how it has worked, it is clear that it was immensely helpful. The Recovery Act is part of the reason why, despite the terrible shocks that hit the American economy in 2008, this recession, as bad as it was, wasn’t a second Great Depression. The policy response was much more effective and much more aggressive than it was in the early thirties. Another part of the Great Depression that Chandler talks about that had a big impact on my thinking is what happened in 1937. Basically, monetary and fiscal policymakers got tired of all the exceptional things they were doing to help the economy, and they tightened policy too soon. The result was a “depression within a depression” – a big downturn that sent unemployment shooting back up when we were far from fully recovered. That episode was very much in my mind as we learned over the first half of 2009 that the recession was much worse than almost anyone had expected, and that the recovery would likely be slow. It was a big reason why I argued that it would be a terrible mistake to take away support for the economy too soon, and that in fact we needed to be doing more, not less, to help the economy."