By STEVE LOHR
Published: January 26, 2009
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.
New Yorkers waited for food in 1934. In the ’30s, total government spending as a share of the economy was less than 20 percent and the unemployment rate averaged more than 17 percent.
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.
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