* The Forgotten Man by Amity Shlaes

An interesting expose of the Hoover and FDR administrations during the Great Depression. You'll be struck by how left leaning the FDR policies were, how bone headed macro-economists were, and how close the country came to the brink of revolution. The hero of the book will turn out not be a president, but a businessman.


In 1925, the Federal gov’t was a pygmy. Its size was less than 2% of the GDP, smaller even that of state and city gov’ts. P20 Why is this important? Today’s gov’t is over 10 times larger, and gov’t spending or saving can therefore make a big difference in the overall economy. A massive 50% increase in federal spending in 1925, could only increase the GDP by 1%.

“The way to wealth is as plain as the way to market. It depends chiefly on 2 words: industry and frugality. That is, waste neither time nor money, but make the best use of both.” – Andrew Mellon p24

“Find a man who can run a business and needs capital to start or expand. Furnish capital and take shares in the business, leaving the other man to run it except when he is in trouble. When the business has growth sufficiently to pay back the money, take the money and find another man running a business and in need of money and give it to him, on the same basis.” – Andrew Mellon, the first VC? P25

Income taxes in those days applied only to the rich and those rich paid extremely high rates, the top being 73%. Mellon believed that rate was prohibitive [Mellon by the way was worth over $200M in 1925 dollars, which would be many billions today]. It killed investment, and therefore jobs… When a gov’t overtaxed, it hurt itself, for it got less revenue. Taxes that were too high simply were not paid. In the end lawmakers wrote loopholes that enabled high earners to escape. P31

Hoover created a Division of Simplified Practices, whose job it was to standardize and harmonize the distressingly fractious and unresponsive manufacturing and construction sectors. In those days roads were often paved with brick, and brick was a typical example: 66 different sizes were being produced when Hoover ordered research on this topic. This was sheer waste as far as the utilitarian Hoover (who was a Stanford educated mining engineer) was concerned. He therefore pulled the nation’s paving brick firms into a room and settled matters; the range of sizes dropped from 66 to 11. Hoover also looked into brick for home; here he claimed victory outright, for the number of sizes went from 44 to 1. Then there were beds. 74 different sizes were available; as a result of encouragement from Hoover the figure went down to 4. p37

William Graham Sumner [Yale philosopher] and Irving Fisher [infamous Yale economist who will be eternally known for his bad call on the 1929 stock recovery that never occurred in his lifetime] disagreed on many things. Sumner had told Fisher that if life came down to a choice between socialism and anarchy, he would take anarchy. Fisher would choose socialism… Fisher believed that the gold standard slowed growth. One of its problems was that gold was too unpredictable, and that a stabler currency might be arrived at by linking the dollar to a group of commodities instead of gold. P40

In 1927, many of FDR’s future policy leaders would go on a junket to visit most notably communist Russia and fascist Italy. In their summary speaking about the achievement of revolutionary Russia, one penned “I have been to the future and it works. I would like to spend the evening of my life watching the morning of a new world.” P51 Many would later criticize FDRs policies as being socialist. Could this trip, where Stalin carefully orchestrated what the Americans would see and witness, have had an impact on those who shaped the policies later? If so, their experience was not an objective one on which to base policy – as the history of Great Depression proved.

After the October 1929 market crash, many investors were losing their livelihood. Most famous was the pair of men who committed suicide by leaping out of the window while holding hands: they had maintained a joint account… But the despair was not uniform: indeed, on November 13, 1929, NYC’s chief medical officer reported that there had been 44 suicides in the proceeding 4 weeks, 9 fewer than the 53 for the same period in 1928. As for banks, some were failing, but the rate was not outside the norm for the 1920s. Total bank failures for 1929 would be lower than the same statistic for 1924, 1926 or 1927. The nation’s first impulse was correct… The miracle of the 1920s had followed a rough downturn at the start of the decade, and then a comeback. Such crashes – or panics – did not make a lengthy slump inevitable. P88

In previous economic downturns [which are deflationary], companies were able to trim losses by cutting wages… Hoover’s humanitarian policy sent a signal nationwide: do not lower wages. In the end, business had to choose between lowering wages and shutting down. Often, they shut down…Albert Wiggin of Chase Bank argued that Hoover had his logic backward about wages. ‘It is not true that high wages make for prosperity. Instead, prosperity makes high wages.’ P94

Many Americans wanted to see Stalin’s experiment for themselves. Some 2500 had visited the Soviet Union in 1929. The next year it doubled, and it more than doubled again by 1931. That same year, Amtorg of Russia announced it had 6000 skilled jobs to fill, and it received over 100,000 US applications. P117

The maximum top rate when the income tax was first introduced, less than 2 decades back, had been 7%, and that was only on incomes over $500,000. p131

The deflation of the Great Depression had become so severe, that there was enough money for the basic economy to function. Bartering came back into vogue.
Salt Lake City had now gone further than barter. The townspeople banded together and created a group that made its own money. They had given their unit the reverberating name of the vallar. Citizens could work to earn vallars, and they in turn could use those vallars to buy oil, soap, coal, food, meals, etc… By the end of 1932, some 10,000 people would be in the vallar system… In Arizona, the legislature, by a special act, ordained a state script, to be issued into denominations up to $20. As it happened the script was not used. But that didn’t stop other private firms from generating their own. The Nogales (AZ) Herald issued its own bills. In areas near the border, Mexican pesos began to trade at a premium; the peso become another form of American currency… The barter systems kept growing; by the spring of 1932 there would be some 150 barter/script systems in operation in 30 states. Perhaps 100,000s used script, and barter enthusiasts claimed the number of those engaging in some form of barter had hit a million. P138


To the outside world, FDR and his coterie of scholars, seemed to be basing their policy on sound academic theory. Well if they only knew…
One morning, FDR told his group he was thinking of raising the gold price by $.21. Why that figure?, his entourage asked. ‘It’s a lucky number because it’s 3 times 7’. Morgenthau later wrote ‘If anybody knew how we really set the price of gold, I think they would be frightened.’ P148

There was little escaping the National Recovery Administration (NRA). Some 22M workers came under its 557 basic codes… The NRA had the authority to set production quotas, an authority used to curtail supply in the name of driving up price. For example the price of oil had dropped to $.04 per barrel by May of 1933. In other industries, the NRA rules were equally specific. The NRA code determined the precise components of macaroni; it determined what tailors could and could not sew. Customers could not choose their chicken from the coop… The idea was to increase efficiency. P151
And now the socialist notions price and work controls started to rear their ugly heads, making the economic downturn even worse.

Landowners had historically hired sharecropper labor because they themselves made profits from their share of the crop that the tenants planted and harvested. The relationship had become more tenuous as crop prices came down, and there was less for the landlord and tenant to share. The tractor, a new arrival, was already obviating the need for the sharecropper – and now the gov’t was paying the landowners not to farm the land (to drive up crop prices). Removing the tenants began to make sense. P168
Thus another policy to increase income ends up causing more unemployment.

Nascent power companies would sell irons [and other electrical appliances] at cut prices to housewives to boost demand. P184
Today, that same power company gives you a big rebate for buying appliances that use less power. Go figure?

FDR had understood something that the Republicans had not. The contest not Democrat vs. Republican but rather the classical republic vs. the classical democracy. Gov’t was less a representative republic than it had once been, more directly controlled by the people. The change had started back in the 1910s with the constitutional amendment to permit the electorate to pick senators directly rather than through state legislatures. Suffrage for women had accelerated it. And the depression had accelerated it again… Voters were asking in a very democratic way what gov’t was doing for them. P266

Citizens were using old tax breaks – legally. But FDR was now set on erasing the old distinction between evasion (illegal) and avoidance (legal)… He set out to prove that the intention of taxpayers who failed to complete returns correctly was malign; where there was ambiguity, taxpayers ought to be presumed guilty. This was especially disingenuous of FDR because he would submit an ambiguous tax return for 1937. His income would be $75k as President, but there would be other issues that complicated the return. As he would write to his IRS commissioner ‘I am wholly unable to figure out the amount of the tax for the following reason…’ His own tax problem was something only experts could solve. P312

On June 24, 1937, the IRS commissioner named 67 ‘large wealthy tax payers who by taking assets out of their personal boxes and transferring them to incorporated pocket books have avoided paying their full share of taxes.’ The tax decisions of these men were, the Treasury acknowledged, ‘perfectly legal’ but still not conscientious. P313

Now that FDR wanted to balance the budget, and some WPA jobs had to go. Instead of accepting change, as FDR expected, the WPA workers were mimicking their private sector brothers and striking. This seemed like ingratitude. How much, after all, could the gov’t pay them? P323

The Wagner Act had been created to provide a legal basis for protest. But instead of staying within the safe confines of the law, the protestors were pushing the envelope, seeing how far they could take the country. The strikes had the effect of escalating the battle… The pattern – concession followed by escalation and radicalization – seemed far too much like not only Italy but Russia after Kerensky or Germany after Weimar for comfort. P324

The problem in 1937-8 was not that the New Deal was mismanaging or punishing one sector of the economy over another. It was that it was competing with the private sector, and frightening it. The solution to the depression within the Depression was not anything special… If FDR wanted the economy to thrive in peacetime, he had to call off the gov’t competition. P351

“If the war should be over before the election in Nov 1940, and I am running against Willkie, he would be elected.” –FDR

FDR knew that he needed more than economy that looked good. He needed an economy that was actually strong. A war on business (New Deal) and a war against Europe could not happen at the same time. P379

Roger Baldwin – cofounder of the ACLU was initially a leftist group supporting Communism. But by 1959, Baldwin stated ‘We went wrong, we were starry-eyed. We didn’t see the potentiality of totalitarianism.’ P385