The period between late 1929 and the beginning of the 1940s is, of course, known as the Great Depression.  But in a real sense, it could be called the Great Depressions.  There was more than one massive downturn in all things economic during those days of deprivation.

Five years after Franklin Delano Roosevelt spoke so eloquently about “fear itself” - and then began to fulfill his promise of  “experimentation” (as opposed to an actual plan), things were really no better than the day he took office.  His “hundred days” of frenetic legislation gave way to years of false starts and faded hopes. 

In early 1938, unemployment was at the 1931 level of 17.4 % and the Dow Industrial Average – at 121 - was still less than half of its 1929 high.  The Dow would not actually return to pre-crash levels until Dwight D. Eisenhower was well into his first presidential term. 

Amity Shlaes, in her fascinating book – a must read these days – The Forgotten Man: A New History of the Great Depression, gives us a snapshot of the situation half a decade into the politics, policies, and promises of the New Deal:

“The country was now at an odd moment.  There was a new sense of permanence about the Depression.  Being poor was no longer a passing event – it was beginning to seem like a way of life.”

What started as a panic in 1929 soon morphed into something more sinister, deadly, and often overlooked: deflation.  As money became scarcer, prices fell. Declining prices, if allowed to continue for long, tend to lead to a dangerous downward spiral of negatives – things like falling profits, closing businesses and factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.

Deflation is the monster – the category 5 economic storm – to watch out for and guard against.

Early on during the Great Depression, housing values, though not starting the problem, became a leading indicator of the severity of the crisis.  As prices moved down, homeowners found themselves with homes worth less than the mortgage amount.  This led to a deflationary meltdown. 

Sound familiar?

There are two knee-jerk things that both Herbert Hoover and Franklin Roosevelt did that actually ensured that the Depression would have a long run.  First, Hoover stifled free trade when he, against the advice of many economists and business leaders, signed a protectionist tariff  (Smoot-Hawley) bill.  He ignored doomsday warnings that this “would spell economic isolation” and lead to the “most severe depression ever experienced.”  Sadly, those warnings came true.

And both Hoover and Roosevelt fought the Depression by raising taxes. 

Mr. Hoover gave us the Revenue Act of 1932, which burdened people already having a hard time holding on to homes and making ends meet.  With deflation, dollars were worth more, so the government was taking these increasingly rare and more valuable dollars out of the hands of the people, in many cases sealing their financial doom. 

Franklin Roosevelt wanted to change society through tax policy.  He seldom met a tax he didn’t like.  The president clearly cultivated his image as an enemy of the “great accumulation of wealth” and the protector of the “people” from corporations, utilities, and other usual suspects who become convenient rhetorical targets during times of economic crisis and confusion. 

As the Great Depression lingered, Americans languished.  Washington tended to do the wrong thing at the wrong time.  As people watched the president, with a complicit Congress, raise taxes they wondered: “With business so hard, why make it harder?”

Conventional historical wisdom – the legend and lore of days gone by – suggests that Hoover was a “do-nothing” president who fiddled (better: fished) while the country burned.  Then came Roosevelt on his white horse – a man of action (like his distant relative who also served as president).  He saved the nation – and everyone lived happily ever after until he had to save us again – from the Nazis.  

But, as Shlaes points out, the two men actually had much in common:

“Hoover and Roosevelt were alike in several regards. Both preferred to control events and people.  Both underestimated the strength of the American economy.  Both doubted its ability to right itself in a storm.  Hoover mistrusted the stock market.  Roosevelt mistrusted it more.

Both presidents overestimated the value of government planning. Continued...