[Working backward from the year 2000 toward America’s beginnings.]
The long, long recovery
Roosevelt was not shy about trying new things. He told his subordinates to try something, and if it didn’t work, try something else. Anything but inaction. For a while, that new sense of energy did help. The economy began to improve, but only slowly. And although they didn’t know it, the efforts of Roosevelt and his congresses were being sabotaged by a theory. The theory was that whatever the government spent, it took out of the economy either by taxes or by borrowing, and therefore the best road to recovery was a policy of strict government economy. (This was, anyway, one of the things Roosevelt had pledged in his campaign, probably sincerely)
But in the circumstances, government action to prime the pump was probably the only thing that would have worked. The basic problem was lack of effective demand. There was a huge amount of potential demand: all those hungry people constituted a bottomless well of demand. In his second inaugural address, on January 20, 1937, he would describe the situation in a short sentence: “I see one-third of a nation ill-housed, ill-clad, ill-nourished.” And the only way to turn potential demand into effective demand is to get money into people’s pockets. (If nobody has the price of a meal, it doesn’t matter how much food is available for sale.)
The question is, how do you accomplish the necessary task of putting money in people’s pockets to restart the economy without doing more harm than good? The only way the America of 1933 knew was jobs – and if nobody in the private sector had the money to start businesses to hire people, where were the jobs to come from, if not for the government? Roosevelt embarked on a massive program of public works, on the theory that (a) people needed work, (b) there was plenty of public work to be done, (c) hard times are the best and most economical times in which to embark on major projects, because money is cheap and so is labor. It worked pretty well, but as soon as the economy seemed to be recovering, there was pressure to reduce government expenditures, which withdrew the stimulus and threatened to resume the deflationary spiral.
No need to trace the eight years of Roosevelt’s two peacetime terms. Probably the most effective thing he did to stabilize the economy was to sponsor the Social Security Act, which assured seniors a basic pension, thus lifting a burden form their children and assuring that at least some of the potential demand became effective. In retrospect, it seems that everything he did was getting the country read to play a larger part in the next war and the years thereafter, but the future was as hidden from them then as it is from us now. If something prepared this country for the global role that was ahead, it was something more than human. Earlier ages would have called it divine providence.
So that’s how we went from the mini-boom and mini-bust that followed the end of World War I to the stock market of the Roaring Twenties, and the crash and the onset of the Hungry Thirties, on our way to the Fighting Forties. Nobody thought up a catchy name for the decade that followed the Gay Nineties or the one that included World War I, but it is to that time that we turn next.