The New York Times Printer Friendly Format Sponsored By January 27, 2009 F.D.R's Example Offers Lessons for Obama By STEVE LOHR
In 1933, as today, a new president stepped into the White House, vowing change and decisive action at a time when a banking crisis posed a grave threat to the nation's economy. The economic morass that confronted Franklin D. Roosevelt 76 years ago was undeniably deeper and more ominous than the trouble President Obama is facing. Yet, according to economists and historians, there are also some telling similarities and cautionary lessons to be drawn from the experience of the Roosevelt years in the 1930s. Roosevelt had his triumphs. He stemmed panic and stabilized the banking system with a combination of deposit insurance, government investment in banks, restrictions on banking practices and his "fireside chat" radio addresses, which repeatedly steadied the national mood and bought Roosevelt time to make changes. Still, even after the government assistance, the surviving banks were shaken and lending remained anemic — much as the nation's banks today are reluctant to make loans again, despite receiving more than $300 billion of taxpayers' money in Round 1 of the federal banking bailout. So, throughout the 1930s, economic recovery remained frustratingly elusive and arrived only with the buildup for World War II in the 1940s. The shorthand verdict on Roosevelt, economists and historians say, is that he was an eloquent and skillful politician, and an innovator in jobs programs like the Civilian Conservation Corps and in regulatory steps like the creation of the Securities and Exchange Commission to police Wall Street. But Roosevelt, they say, while brilliant in many ways, did not have a sure grasp of how to guide the economy as a whole. "Roosevelt had some successes, but we hope that Obama is going to do better," said Kenneth S. Rogoff, a professor of economics at Harvard. "Otherwise, we're in trouble." Roosevelt's New Deal is often portrayed as an embrace of Keynesian economics, which advocates increased government spending to combat economic downturns and generate jobs. Yet despite New Deal programs and some aid to the states, total government spending — federal, state and local — as a share of the economy throughout the 1930s remained at just under 20 percent. (Today, total government spending is more than 35 percent, a larger buffer against weakness in the private sector.) During the 1930s, the unemployment rate fell somewhat under Roosevelt, but remained stubbornly high, averaging more than 17 percent for the decade. In 1934, the British economist John Maynard Keynes visited Roosevelt in the White House to make his case for more deficit spending. But Roosevelt, it seems, was either unimpressed or uncomprehending. "He left a whole rigmarole of figures," Roosevelt complained to his labor secretary, Frances Perkins, according to her memoir. "He must be a mathematician rather than a political economist." Keynes left equally disenchanted, telling Ms. Perkins that he had "supposed the president was more literate, economically speaking." It would not be until the early 1940s, with the beginning of World War II, that a strong dose of Keynesian medicine was administered to the American economy. By 1942, total government spending as a share of the economy rose to 52 percent, and peaked at nearly 70 percent in 1944, when unemployment fell to 1 percent. One lesson from the 1930s, economists say, is how difficult it is to engineer a recovery when an economy has spiraled down as far as it had by 1933. Swift and effective steps early in a downturn, they say, can enable an economy to avoid further slippage and joblessness. And Mr. Obama has the advantage of taking over far earlier in an economic descent than Roosevelt did. In 1933, the United States economy had shrunk by one-third in real terms since 1929. Industrial production had fallen by 40 percent. Unemployment had soared to 25 percent, from 3 percent in 1929. "Mute shoals of jobless men drifted through the streets of every American city in 1933," wrote David M. Kennedy of Stanford, in his Pulitzer Prize-winning history of the Depression, "Freedom From Fear" (Oxford, 1999). Roosevelt was inaugurated on March 4, 1933, amid a nationwide bank panic — the impetus of his memorable line, "The only thing we have to fear is fear itself." Roosevelt may have been lacking as an economist, but he was an extraordinary crisis manager. The next day, he declared a national bank holiday, and set the Federal Reserve and the Treasury to work on a phased program to sort good banks from bad ones, provide financing and restore confidence in the banking system. In his first fireside chat on March 12, Roosevelt addressed the nation to discuss the banking crisis. He started with a brief education in how banks work, with most money not held in their vaults but lent out. "The bank puts your money to work to keep the wheels of industry and of agriculture turning around," he said. Bank runs, by themselves, can bring commerce to a halt. He reassured his listeners, "It is safer to keep your money in a reopened bank than under the mattress." And he appealed: "You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear." At the time, listeners had only Roosevelt's word that his plans to stabilize the banking system would work. But he had an uncanny ability to communicate in simple and convincing terms. When the stock market reopened on March 15 after being closed for more than a week, the Dow Jones industrial average jumped more than 15 percent, the biggest percentage gain ever in one day. "Roosevelt was a genius at using those fireside chats to calm the national mood and restore confidence," said John Steele Gordon, an author and business historian. "Never underestimate the power of psychology in the economy. We're seeing that now." Roosevelt deployed his persuasive powers to buy time for his programs to address the banking problem. Besides deposit insurance and a banking act that controlled competition and interest rates, Roosevelt drastically enlarged and expanded the role of the Reconstruction Finance Corporation, which was established in 1932. The agency made loans to troubled banks, and seized and sold off distressed assets at others. After government inspections, many small banks never reopened, with more than 4,000 closed in 1933. The agency also bought stock in 6,000 banks, at a cost of $1.3 billion. In proportion to today's economy, the program would amount to about $200 billion. That is nearly the size of the government capital injections so far in banks as part of the financial rescue package enacted by Congress in the fall. With new capital, Congress and the Bush administration hoped, banks would resume normal lending to businesses and consumers. But worried banks are holding onto the money, so there has been scant benefit to the economy from the government help to the banks. Roosevelt, it seems, had the same problem. "He was much better at reassuring the public that the banks were safe than he was at persuading the banks to lend again," said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. Throughout the 1930s, Mr. Sylla said, the amount banks lent for each dollar of reserves remained at about half the level of the 1920s. Today, a range of steps is being examined by the Obama team to resolve the banking logjam. They include taking the toxic mortgage-backed assets from the banks in a separate agency and selling them off to partial and wholesale nationalization plans. Some of these echo tactics used by the Reconstruction Finance Corporation of the Roosevelt era. "But the banking crisis today is more complex and more global, so we'll have to do something bigger than the R.F.C.," said Simon Johnson, an economist at the Sloan School of Management at M.I.T. More government spending beyond the planned $825 billion economic recovery plan, economists say, is probably in the cards as well. Roosevelt is seen as the father of big-spending government, yet the judgment of history seems to be that in the 1930s he was too timid. "The lesson from the 1930s and early 1940s is that the government has to do much more than it has done so far, both to end the financial crisis and to get us out of the recession," said Mr. Sylla of N.Y.U. "I do think the Obama team knows this and seems prepared to act on the knowledge." Copyright 2009 The New York Times Company -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
