Book Review: George Melloan's 'When the New Deal Came to Town'
It hit me on a Sunday night back in the fall of 2008. Troubled investment bank Merrill Lynch was selling itself in firesale fashion to Bank of America. What will forever be known as the "financial crisis" was in full swing.
So while this column has argued with great regularity that there was nothing "financial" about what happened in 2008; that the "crisis" resulted from government intervention in the healthy failure of banks, investment banks, carmakers, and nominal homeowners, the reality then was that something big was happening economically. A regular keeper of a daily journal, I wrote down my thoughts.
My broad observation was that life went on. College football and NFL stadiums were still full, kids went to school, and while unemployment soared, no one starved. I remembered thinking - thankfully - that economic crises of the American variety would rate as boom times for most other countries. It was surely scary back in 2008, but if most Americans are honest they continued to live their lives similar to how they did before the fall of '08. At least that's what I remember.
What about back in the 1930s? The years 1929-1941 are known as the "Great Depression" era for the U.S., but was it a depressing time? Were Americans thoroughly downcast to the point of immobility thanks to an economy that history says was persistently slow? The answer is no.
Evidence supporting my claim is an essential new book by George Melloan, retired deputy editorial page editor of the Wall Street Journal. The modest man in Melloan would never say it, he may not even know it, but with his 1930s memoir When the New Deal Came to Town: A Snapshot of a Place and Time with Lessons for Today he's written one of the most important economics books in a very long time. In recalling the Great Depression as he experienced it as the youngest child in a family of ten in Whiteland, IN, Melloan is reminding readers that American-style downturns are neither "Great" nor are they terribly depressing. That they aren't offers powerful lessons about the present.
The Whiteland of Melloan's youth was as Middle America as they come, but also prone to be victimized by mistakes made in Washington, D.C. that gave us the extended period of subpar growth. Importantly, the skillful economics writer in Melloan doesn't hide from the governmental mistakes that needlessly turned a healthy downturn in 1929-30 into the lengthy period now known as the Great Depression. As Melloan puts it in the book's introduction, "When Washington makes mistakes, even with good intentions, they often are doozies." Melloan's story is focused on the "rural people whose lives were subject to the policies." And make no mistake, people from Melloan's hometown were hurt by the slow economic years. Melloan's father lost his farm on a bad investment, and then failed in a second attempt at farming in the latter part of the 1930s. The family of Melloan's future wife similarly lost its farm. This was a trying period for sure, and Melloan doesn't hide from it.
Still, as he also stresses early on in his excellent story of a misunderstood time, "This is not a ‘victims' book." Rather than paint a picture of devastation and sadness as so many writers have before him, Melloan has chosen to inspire readers with a story of a town that didn't collectively curl up into the fetal position and sulk. They did things, and most of all they pursued "production" with great gusto given their innate knowledge that their production was the source of their demand. Say's Law was a given to these people. Their story is one of "how life went on, [and] people coped with economic adversity." Most important of all, the inhabitants of Whiteland "ate, slept, made love, raised children, and tried to keep body and soul together by finding ways to make a living." Indeed. How this reviewer wishes every American voter certain that the U.S. can't survive either Hillary Clinton, Donald Trump or both would read Melloan's book. It's so much bigger and means so much more than the modest title suggests. Melloan's book reminds us that this too shall pass. American citizens will still be the envy of the rest of the world and Americans the most economically productive people on earth in 2020; this despite the embarrassing reality that their president four years from now will either be Hillary Clinton or Donald Trump. Policy surely matters as Melloan makes very clear, but his memories of a time and place also remind us that even when shackled by egregious government error, Americans continue to produce - and by extension consume - a great deal. The Great Depression was perhaps not as great in a desperation sense as we've been told. When America loses an economic step, it's usually the loss of a step that others never had, nor one that they could ever hope to have.
And while all the overdone hysteria about November 8th will be touched on again in this review, for now it's important to focus on a very personal history for Melloan that is also part economics book; albeit one thankfully free of "fifty-dollar words or squiggly equations or even graphs." Melloan thankfully doesn't suffer science envy in his approach to economics. He understands well that economics is merely the "the study of human behavior" such that it can't really be considered a science in the first place. Amen to that. Too bad an economics profession convinced that it can plan or decree prosperity is almost wholly unaware of what Melloan knows. Among their many thoughtless beliefs, most economists still think - tragically, horrifically and embarrassingly - that war is the antidote to stagnation. Melloan views prosperity differently and more peacefully: to him prosperity is as basic as removing or reducing the tax, regulatory, trade and monetary barriers to production. In the 1930s, those barriers grew bigger and more destructive.
Under Hoover the top tax rate on income rose from 25 to 63 percent, only to soar into the 80 percent range under FDR. On the regulatory front, Melloan writes that as of the 1920 census, "people living on farms or in rural towns serving the farm community comprised 48.8 percent of the American population." This mattered because thanks to hideous laws like the Agriculture Adjustment Act, more and more farm activity was being controlled from Washington. The Smoot-Hawley tariff "raised tariffs on 20,000 imported items to record levels," and if foreigners couldn't sell to us (are you listening Donald Trump?), they also couldn't buy from us. Melloan reports that after Smoot-Hawley "U.S. exports nosedived to $1.7 billion in 1933, down from $5.2 billion in 1929." Investors are the drivers of economic advance thanks to their commitment of capital in the present in return for dollar income streams in the future. But with FDR having devalued the dollar early in his administration from 1/20th of a gold ounce to roughly 1/35th, investment was necessarily scarce. We can't consume without producing first, yet the barriers to production were everywhere.
Notable here is that monetary policy was the one subject of economic disagreement with the author. While I agree with Melloan that the "Fed should never have been invented," I disagree with his view that the same Fed "played a significant role in the 1930s debacle." Melloan argues that in the 1930s the Fed "was mainly a bystander," and that was the point. The Fed's role back then was thankfully minimal, and limited to it acting as a lender of last resort to solvent banks. Yet solvent banks back then didn't need the Fed, and the insolvent ones shouldn't have been saved as is with the health of the banking system very much in mind. For any sector to prosper, it's very necessary that the laggards be allowed to die. While it again shouldn't have been invented, the Fed acted as it should have in the ‘30s.
Indeed, as Melloan himself wrote in this great book, "In a free market, the normal response to falling prices would be to redirect resources - capital, land, and labor - into more profitable ventures." So true, and this is how we should view the implosion of banks and other businesses back then. Had government gotten out of the way in the way that the Fed properly did, the correction would have been quick, and the 1929-30 recession limited to that timeframe. Melloan would seemingly agree with all of this, but critiques the Fed for seemingly failing to supply enough dollars to the detriment of the 1930s economy. I say that his other analysis trumps his Fed, deflation, and money shortage argument.
Figure that production represents demand for money, so with the various barriers to production having been erected, it's no surprise that this revealed itself through fewer dollars in a less productive U.S. economy. Absent those barriers, money would have found its way into the U.S. economy regardless of the Fed's actions vis-à-vis banks. Even then banks were a small - and shrinking - source of total credit in the U.S. economy. Let's also not forget that so-called "money supply" similarly plummeted in 1920-21, but with no decade-long impact. There wasn't a lengthy downturn in the 1920s simply because Presidents Harding and Coolidge set about erasing governmental barriers to production during that decade. Perhaps more important, their 100% correct response to the 1920-21 recession was to do nothing. Recessions are the cure, they're the cleanse of bad habits, poor uses of labor, and erasure of businessses that are holding down growth in the first place. Respect for the good of recessions in 1920-21 logically gifted the U.S. with a booming decade subsequently; the medication of what was a healthy recession in the 1930s arguably the signature source of stagnation in that decade.
But after that, Melloan's very own excellent book disproves the argument that blames the Fed for the 1930s. Melloan writes of surging demand for automobiles in Los Angeles during the Depression. If life went on and people found ways to make a living in 1930s Whiteland, they really found a way to live and make a living in the Los Angeles of the same era. Melloan's older brother Bill was one of the many men from Indiana who, eager for adventure, bit on an offer of $50 to drive a car out to sunny LA. Bill came back a little bit skeletal thanks to a shortage of funds, but his younger brother reports that the adventure was worth it to him. In a bigger sense the booming aspects of 1930s Los Angeles remind us that "money supply" is an effect of production as opposed to something a central bank can plan. As evidenced by all the demand for cars on the west coast, money supply out there was high to reflect a higher level of production on the coast. Amid the Great Depression, the number of automobile owners in California surged, the Fed be damned. Where there's production there's always and everywhere money.
Notable about all this is there was money in Whiteland too. Not lots of it, but enough. People there continued to produce, and because they did, they ate, sang, danced, etc. Melloan isn't a "Great Depression denier," he knows as well as anyone that errors in Washington needlessly elongated a recession that should have been short, but at the same time his book sets out to rehabilitate the decade. It wasn't all bad. Figure that the Franklin Evening Star, the local newspaper, didn't even report on the October 24, 1929 stock-market crash. As for Melloan's parents, James and Sara, "they had better things to do" than to think about president Franklin Delano Roosevelt, who reached office only to further doctor what needed to be left alone. Lengthy downturns are always and everywhere a function of the policy doctor medicating the patient. Hoover ("The government has expended public works, assisted in credit to agriculture...") and Roosevelt's intervention in what was healthy needlessly extended the pain, much as George W. Bush and Barack Obama's interventions roughly eighty years later needlessly extended the pain once again. Yet life went on post-2008, and it did so in the ‘30s too.
In the Whiteland of middle America the Great Depression included Hollywood movies that "had opened up new vistas," pinching pennies to buy clothes at "L. Strauss & Co., the best men's store in Indianapolis," and dates at the Circle Theater. Melloan writes of how the Mullendore family "turned part of their farm south of Franklin into a flying field, offering lessons in Piper Cub and Taylorcraft airplanes." Lest we forget, when the 20th century dawned it was accepted wisdom among the smartest that man would never fly, yet in unremarkable, Depression-era Whiteland people were taking flying lessons during the worst downturn in U.S. history.
These were also interesting times away from rural locales like the one in which Melloan grew up. As he reminds readers, "Babe Ruth, the legend of the 1920s, was still hitting home runs for the Yankees in the 1930s," while "Jesse Owens, the great track star, would win fame at the 1936 Olympics, much to Hitler's chagrin." Perhaps most descriptive of all is that "Ain't We Got Fun?" was still a popular song in the 1930s despite it having been released in the 1920s. Melloan writes "Well, actually we did have fun. Depression or not." Melloan's future wife was actually jitterbugging with her brother to radio tunes when reporters broke in to report the Pearl Harbor tragedy.
Importantly, Melloan's book isn't just about economics, about the good and fun of a decade most known for being bad and dour, it's also about the people. Whitelanders weren't quitters. They once again produced so that they could get. Most uplifting in this sense is the author's recall of one Ralph Barger. Melloan writes that today Barger would be classified as "handicapped" and "deserving of pity," but back then this dwarf-sized man whom many would avoid out of fear worked day and night essentially as a middleman for those "importing" and "exporting" in and out of Whiteland. Barger wasn't fazed by the Fed's machinations. Neither was Orel "Chewtabac" Woods who, among other things test-drove Duesenbergs for a living before the cars were delivered to their well-to-do owners. And then there was Harry Porter, a local drugstore owner who, eager to see more of the U.S., got on a DC-3 and flew to San Francisco. All during the Great Depression.
So while it's once again a truism well known by Melloan that government intervention needlessly gave us an endless downturn that was later described as the "Great Depression," his book is a happy and beautiful reminder that our "Depressions" that are "Great" would read as wildly happy times to most anyone else in the world. Figure even the horrid Agricultural Adjustment Act was all very much about limiting food production and quite literally exterminating farm animals. The economics of these programs were and are horrifying, but they're a reminder that even during bad periods Americans have had enough in the way of food that they could be really stupid with it. People in Haiti would give up everything they have now to live as Americans did in the 1930s.
And that's seemingly Melloan's point in a book that reads to this reviewer as excellent and important at the same time. Americans have in some ways forgotten how good we have it, and also how good we've always had it. Melloan has reminded us. America didn't become Venezuela then, and it's not about to become Venezuela now despite what we hear from Clinton and Trump partisans about how awful are Trump and Clinton.
The above in mind, Melloan reminds us that much as Democrats and Republicans erred in 2008 to our broad detriment, "whether they call themselves Republicans or Democrats, they made some very big mistakes" in the 1930s too. This requires repeat over and over again to the individuals we all know who believe that Donald Trump or Hillary Clinton must be the next president if the U.S. is to survive. Please. What an insult to a great nation. Melloan would surely scoff.
Indeed, as he reveals so charmingly in When the New Deal Came to Town, Americans are made of much sterner and much more fun stuff than to allow any politician to ruin their lives. Awful as Trump and Clinton are, we Americans will have fun despite them. And we'll keep working too. If readers doubt the previous truth, they should buy Melloan's wonderful new book. And if they believe Melloan, they should still buy his essential book for re-reads during the occasional dark days ahead that will only be dark insofar as government does too much.