Unemployment and Economic History

12/27/2010 11:20 am ET | Updated May 25, 2011

If you want to understand what the U.S. faces today with no prospect of bringing unemployment down to 3 or 4 percent you need to read Since Yesterday, Frederick Lewis Allen's book written in 1939 about the Depression years in America. Allen was the editor of Harpers magazine. In 1930 he had written a classic book about the events and attitudes that marked the Roaring 20s. Since Yesterday, on the Depression decade is more relevant today.

What Allen shows is that the businessmen of the 1920s, who had inspired awe, those who Calvin Coolidge called the "Big Men" of the country, and who the country had admired and trusted, were completely discredited by 1933 when Roosevelt took office. Herbert Hoover had gamely taken the advice of the Big Men and it failed him. They had no idea how to end the Depression. Andrew Mellon, Treasury Secretary to Coolidge and Hoover and one of the richest men in America, and Samuel Insull, the Chicago-based "leverager" of utility stocks were facing de facto exile. Richard Whitney, once head of the NY Stock Exchange would eventually go to prison in handcuffs. By 1932, these erstwhile "masters of the universe" were the object of almost universal scorn.

Americans forget this history. When I hear people say that Obama has to listen to business leaders I wonder what they think these leaders have learned since 1933. They and their followers are recommending word for word the policies their predecessors recommended to Hoover --- balance the budget, cut spending, don't tax business. What the American public should learn from this repetitive baloney is that there is a big difference between believing in competitive private enterprise, which we should, and believing that business leaders have insights about policies to end joblessness which they do not.

Frederick Lewis Allen did not stop at revealing the uselessness of the "Big Men's" locker room incantations. He saw the weaknesses of the New Deal too: It never hit on a fully successful approach to unemployment. Joblessness fell from 25 percent when FDR took office to just over 14 percent 4 years later but then went back up to 17 percent in 1938. Allen acknowledges that the New Deal was an improvement, but it was not satisfactory anymore than a few percent reduction in unemployment to 8 or 7 percent will be satisfactory in the next three or four years.

Roosevelt's advantage over Obama is that Americans felt he cared for them. In "the legislation which he sponsored," Allen says, "(ordinary Americans) read a genuine friendliness toward them, a genuine desire to help them." .

Since Yesterday was published in 1940 so Allen had not seen what finally ended the Depression. What did was World War II. It put 13 million Americans in the armed forces and millions more into defense jobs making ships, planes and munitions. It was financed largely by the Federal Reserve bond-purchasing program far larger than the New Deal's "pump priming" and today's modest "stimulus" programs. Financing the war took roughly 25 percent of Gross Domestic Product for four years.

What the U.S. needs today to drop unemployment to a politically acceptable 3 or 4 percent is the peaceful equivalent of that war, a very large infrastructure bank charged with modernizing the public plant --- transportation, power and water systems, communications, recreation facilities, and more. The Fed should buy the bonds of such a bank, charging it low interest rates, just as it bought Treasury bonds at low interest rates to fund World War II. (This is fundamentally how the Chinese are funding the impressive explosion of public works in their country.) If the U.S. does not create such a large works program, I believe we are going to face a long period similar to the 1930s with corrosively high unemployment. This will discredit democratic governments just as it did during the Depression with all the attendant risks.

The argument for a big works program is based not on economic theory but on concrete historic experience. The history is there for us to draw on. What about today's business heirs to Mellon, Whitney and Insull? A massive infrastructure program financed by the Fed would be the best thing that could happen to American business. Unfortunately historic experience and even the memory of money in their pockets has never been enough to convince the egotistical "Big Men" of business that they are not as important as they believe they are and that sometimes the country needs government to play this role.