MONEY TOO TIGHT TO MENTION:

Debating the Depression: An Interview with Amity Shlaes (Ray Nothstine, Religion & Liberty)

In The Forgotten Man, you talk about the Depression within the Depression, especially in the years of 1937 and 1938. What happened?

The Forgotten Man starts with the story of a boy named William Troeller who hangs himself rather than asking for food. In some of the accounts it even says that he ate two grapes and then he hung himself, rather than ask for food. And the striking thing was that this did not happen early in the depression. This did not happen in the England of Dickens, or in the United States at the beginning of the Great Depression. This happened rather in 1937 or 1938. So that was news, that the Depression within the Depression was so bad, and it seemed important. The recovery disappeared or, to put it more precisely, the recovery chose to stay away. Industrial production went down more than 60 percent. Non-durable production slowed. The stock market dropped. The stock market prices fell 40 percent, and then they fell another 10 percent. The unemployment rate went way up. By some measures it went from around 12 percent up towards 20 percent. So what's happening? Gene Smiley, who was a professor at Marquette, details this factually in his crucial book, Rethinking the Great Depression. Some of these factors had to do with a new sense of a caution. The government was afraid of inflation. So policy was often "too tight." Washington was also afraid that banks would fail. So it said banks especially should have more reserve so that they'll pass all the stress tests, to put it in modern language. And the banking act of 1935 gave the feds the authority to raise reserve requirements. Federal authorities said, this won't matter, and it won't be contraction because the banks have already accumulated lots of reserves now—they are concerned about a repeat of the early 1930s. The point is they wanted a great cushion between them and failure. But what did the banks do when the government increased requirements? They took it as a signal to accumulate yet more reserves. So it's like you pay someone to put their seatbelt on and they already have their seatbelt on. Well they put on a second seatbelt. What else kept recovery away? High labor costs. This was a fact that was discussed thoroughly at the time, but less since. We think that the Wagner Act, which is our great labor law of 1935, is benign and good. But in fact, it gave John L. Lewis, the great labor leader, the authority to bully, which he did, and wages went up higher than companies could afford. And therefore, companies had more trouble. The Forgotten Man is a narrative book, but there are two economists who document this labor cost disadvantage thoroughly and technically. One is Harold Cole at University of Pennsylvania, and the other is his partner, Lee Ohanian at UCLA. Ohanian recently noted in Senate testimony that total hours worked per hour were 20 percent below their 1929 level at the end of the 1930s. So, wow, they made labor more expensive during a downturn and thereby increased unemployment. This was the decade that lived the phrase "nice work if you can get it."