Reason Magazine - Topics > Monetary Policy

The T-Shirt Standard

jwalker@reason.com (Jesse Walker) — Mon, 19 May 2008 10:06:00 EDT

The filmmakers behind Secondhand (Pepe) discuss Haiti's trade in used clothes. An excerpt:

First off, we should note that you can find pepe for sale on pretty much any street in Haiti. It seemed as though pepe lined the sidewalks with small-time vendors selling a few things by hanging them up on the walls by the sidewalk. Then we also visited all types of dedicated marketplaces. Some were very concentrated with just clothing, and these were often by the ports, where the clothing would arrive. Sometimes the pepe would be sold within larger markets where you could also find food and other goods. Sometimes the clothing was sorted into different areas or by peddler’s specialty -- you would have the used shoe guy over here and the lady that only sold t-shirts over there.

In one of the largest markets in Miragoane, just outside of the gates of the port, in the central town square -- you had people opening up boxes and making preliminary sortings. In the Saline marketplace in Port-au-Prince, there was an incredible expanse of peddler/tailors set up with sewing machines, sitting among mounds of clothing, under tents sewn together from fabric scraps and old blankets.

At times, we learn, Haitians have even used these clothes as an informal private currency, similar to the cigarettes described in R.A. Radford's classic "The Economic Organization of a P.O.W. Camp." The whole interview is here.

Elsewhere in Reason: Kerry Howley describes the used T-shirt trade in Tanzania.

30 Years Ago in Reason

Tue, 13 May 2008 12:00:00 EDT

“Scarcely a day goes by without new headlines on the decline of the dollar. In just the past 12 months it has dropped 16 percent against the Deutschemark, 20 percent against the yen, and 30 percent against the Swiss franc.”
—Robert Poole Jr., “Dodging the Falling Dollar”

“The Arkansas Supreme Court has decided that $10,000 is too high a price for the decomposed mouse that Betty McAlpin found in her half-consumed bottle of beer (Budweiser, if you’re interested) and reduced the damages Anheuser-Busch must pay her to $3000. Oh yes; the House just voted to legalize homebrew.”
—Bill Birmingham, “Brickbats”

“Adam Smith has now come to Asia—to the benefit, I might add, of its millions of inhabitants. And who knows, perhaps the success of economic freedom will spur repressive governments to loosen their grip on other areas of people’s lives.”
—Alvin Rabushka, “Pockets of Free Trade in an Unfree World”

The Coming Recession

Mon, 05 May 2008 12:05:00 EDT

As this issue of reason goes to press, the dollar is at a record low against the euro, oil is more than $100 a barrel, consumer prices are up 4 percent from a year ago, and Federal Reserve Chairman Ben Bernanke is cutting interest rates so often that the guys at the office have taken to calling him Edward Scissorhands. The subprime mortgage fallout has yet to finish wreaking its havoc, Bear Stearns is holding on by the skin of its teeth, and the government’s bucket may not be big enough for all the bailouts under way. Gloomy faces dominate CNBC and the Fox Business Channel, muttering long-forgotten terms like inflation and recession.

President George W. Bush, by contrast, is relatively cheery, conceding that we are in “challenging times” but arguing that “our financial institutions are strong” and the capital markets “functioning efficiently and effectively.” “In the long run,” Bush said in a March 17 White House address, “our economy is going to be fine.” And some statistics back up the sunny view: Unemployment is still at a low 5.1 percent, and productivity remains high.

Presidential hopefuls are offering a variety of explanations and possible solutions for what 42 percent of voters say is the most important issue to them, according to a recent CNN poll. At a March 20 rally, Sen. Barack Obama (D-Ill.) suggested the problem was a combination of “special interests” and war: “At a time when we’re on the brink of recession, when neighborhoods have ‘For Sale’ signs outside every home, and working families are struggling to keep up with rising costs, ordinary Americans are paying a price for this war.” Sen. Hillary Clinton (D-N.Y.) took a different tack: The “economic crisis is, at its core, a housing crisis,” she said in a major Philadelphia address on March 24, but she cited other factors as well, including Bush’s “brain dead energy policy.” Sen. John McCain (R-Ariz.) won the Republican nomination without really talking much about the economy.

How will we know when it’s fair to speak the dreaded r-word? In general, a recession is defined as a decline in a country’s gross domestic product for two or more successive quarters. In the United States, an official pronouncement is required from the professional doom diagnosticians on the business-cycle dating committee of the National Bureau of Economic Research, who often take other aspects of an ailing economy into account. GDP growth slowed dramatically at the end of 2007 and is projected to be zero in the second quarter of 2008, so we look to be well on our way.

As oil prices continued to climb and housing prices continued to slide, Reason assembled a panel of economists and other market watchers to help make sense of the headlines, point some fingers, figure out how we got where we are, and offer advice about how to get out with our wallets intact.

Blame the Fed
Gerald P. O’Driscoll Jr.
The U.S. economy is in the midst of an old-style credit crunch brought on by a combination of bad policies and incredibly lax underwriting standards at financial institutions. The biggest policy failure was the decision by Alan Greenspan’s Federal Reserve to hold interest rates too low for too long. That led to a tsunami of credit that inundated the economy with cheap money. Mortgage lenders in particular were flush with funds and searched for deals wherever they could be found. Heretofore unqualified borrowers suddenly “qualified” as underwriting standards relaxed and then disappeared.

Egged on by statements from Chairman Greenspan, market participants came to believe the era of low interest rates would last indefinitely. But the era did come to an end as the Fed was forced to begin raising interest rates. Faced with the prospect of paying higher rates on their mortgages in the future, borrowers began defaulting. First home prices stopped rising, and then home prices began dropping—precipitously in some overheated housing markets. Now we are approximately six months into a new cycle of lower interest rates, but with no end in sight to the crunch.

At least two other factors stoked the crisis. First, many exotic financial products were issued whose value was tied in one way or another to home prices and the value of the securities into which home mortgages were bundled, such as collateralized mortgage obligations. The pricing of these financial products was the product of complex economic models, not the outcome of market transactions. As the value of the underlying homes and mortgages declined, pricing of the financial exotica became nearly impossible. As we learned in the collapse of Long Term Capital Management, these pricing models fail precisely when their accuracy is most important—in times of financial turbulence. The inability to price the financial products has exacerbated losses among the firms holding them.

There is a wonderful parallel here to the collapse of the Soviet Union. As the great Austrian economist Ludwig von Mises argued almost 100 years ago, central planning inevitably fails because there are no market prices to allocate resources. Market prices can only be the outcome of actual market transactions among buyers and sellers. Planners used mathematical formulas to value resources, especially capital. Now Wall Street wizards have imported Soviet thinking to allocate financial capital. Is it any wonder that it failed?

The second factor contributing to the housing market collapse was the federal government’s commitment to “affordable housing.” Lenders, especially Fannie Mae and Freddie Mac, were pressured into promoting housing to low-income groups that could not qualify for normal loans. That policy is predicated on the belief that there is an underserved group of people who, but for economic discrimination or some other market failure, would be homeowners. That social goal and the credit-driven desire for more deals merged into mortgages made without adequate collateral.

We learned two lessons from the drive to make home ownership available to the heretofore underserved. First, many of these were not homeowners because they could not afford a home. Only under the temporary “hothouse” conditions in mortgage markets did they seem to qualify. Second, people who have no equity in their homes cannot meaningfully be said to be owners. When times turn tough, they will walk away. They were effectively renters, not homeowners.

The crisis will end when housing markets hit bottom and the prices of mortgage securities stabilize. Banks also need to unwind their positions in exotic financial derivatives.

The Fed needs to understand it is facing a capital crisis, not a liquidity crisis. The very low interest rates on safe assets show there is ample liquidity in financial markets. The Fed should not supply capital. That is the job of markets, and they are doing it.

Gerald P. O’Driscoll Jr., formerly a vice president and economic adviser at the Federal Reserve Bank of Dallas, is a senior fellow at the Cato Institute.

No Hoofing to Hooverville
Megan McArdle
Just one thing puzzles me about the race to the White House: Why would anyone want to get there? I know that being crowned prettiest girl at the prom is the great lasting rejoinder to everyone who made fun of you in middle school, but given the economic condition of the country, the next four years seem like a rotten time to reign.

Ignore the econopundits making comparisons to the 1930s. While the parallels are striking, we are missing the key ingredient in the onset of the Great Depression: tight Fed policy that caused the money supply to shrink by 25 percent. You can put away that bindle and push the apple cart back in the garage.

But if we’re not exactly hoofing it to Hooverville, we nonetheless face one hell of a rough patch. Record high oil prices, surpassing even the momentous spikes of the 1970s, have brought with them another piece of ’70s memorabilia: stagflation. Federal Reserve bankers are faced with an extremely unpalatable choice. They can tighten up the money supply to combat inflation, at the cost of making the probable recession even deeper. Or they can hang loose and watch inflation march upward while the economy does God knows what. With the credit markets broken, the Fed may end up losing its hard-won credibility as an inflation fighter while producing only marginal benefits to growth.

The president has no control over any of this, but that won’t stop people from blaming him anyway. He will also almost certainly have to come up with some regulatory scheme for increasing transparency and accountability in the vast new financial markets that have been created by the securitization of loans during the last 30 years. It will be a tough order to give investors better information without strangling valuable financial innovation.

But by far his biggest quandary will be the budget. Obama (who I assume will be the Democratic nominee) wants a big new health care entitlement; John McCain wants even more tax cuts. Both will be frustrated by adverse budget math. The economic slowdown is going to cut into tax revenues, and most economists agree that a recession is not a good time to raise taxes—nay, not even on “the rich.” Meanwhile, the baby boomers are about to start retiring, turning Social Security, Medicare, and Medicaid into the sucking chest wound of the federal budget. Assurances that the trust fund won’t run out until 2042 notwithstanding, the president will have to start coping with Medicare deficits as soon as next year, and a falling Social Security surplus soon thereafter. All this will be compounded by the slowdown in GDP growth made inevitable by declining labor force participation and service-intensive elder care.

Any future president should be panicking. That doesn’t mean the rest of us should. At the end of the day, America has the most flexible and resilient economy in the world. We’ll pull through somehow, although a lot of us won’t be very happy in the process. But least happy of all will be the president—the bum we get to throw out when things don’t go our way.

Megan McArdle blogs about economics at The Atlantic.

First, Do No (More) Harm
Ron Paul
This nation is facing an economic crisis the likes of which have not been seen in several generations. It is crucial that we take to heart the lesson that should have been learned after the Great Depression, which is that the central bank should do nothing.

I have been writing and speaking for years about the dangers of the Federal Reserve, but the importance of the actions of the Fed in laying the groundwork for the downturn in the business cycle pales in comparison to the damage done by actions the Fed takes once the downturn arrives. At the first sign of crisis, even with growing inflation, the Fed began to further inflate, lowering interest rates, stepping up open market operations, and injecting liquidity. World markets, already jittery, see these steps as affirmations of their worst fears and react accordingly by selling assets denominated in smoke-and-mirrors fiat currency and fleeing to the solid value of gold, oil, and commodities.

Every action the Fed takes sends a signal that the U.S. dollar will continue to be inflated and therefore debased, which is why the correct action is no action at all. Lower interest rates and liquidity injections are viewed with alarm by foreign markets, while higher interest rates and money tightening are anathema to many domestic investors. The Fed is between a rock and a hard place, and its insistence on inflating the money supply to manage the brittle economy will likely be our undoing.

Until we realize that the Federal Reserve system itself is flawed, and until we recognize that no one economic maestro or committee of economic experts can set prices and plan the economy, this nation will continue to flounder about in an economic malaise. Ending that may take a much more serious downturn than anything we’ve seen yet. It is beyond doubt that our economy is in recession, and the only rational response is for the government to allow malinvested resources to liquidate so that we can return to a stable economy.

While the Fed should take a hands-off approach, Congress should aggressively cut taxes and spending and repeal regulations that stifle economic growth, such as the Sarbanes-Oxley Act. This country has enormous economic potential, an industrious work force, and an enviable history of innovation and entrepreneurship. If the government would learn from its past mistakes and abstain from further interference, we could get back on a solid footing and grow to our full potential.

My fear is that the Fed will continue with its policy of inflation and Congress will be pressured to continue to stimulate the economy with government spending, probably extending to even more outright taxpayer-funded bailouts of financial institutions, subprime mortgages, and government-sponsored enterprises that are “too big to fail.” These debt-funded efforts reward the recklessness of some institutions at the expense of the productive sectors of our economy. Until the federal government acts to extricate itself from intervention in the markets, economic activity will be hindered and true recovery will not take place.

Rep. Ron Paul (R-Texas) is a nine-term congressman and a candidate for the Republican presidential nomination.

The Vicious Ethanol Cycle
Robert Bryce
I see three big dangers to the global economy: the ongoing fallout from the mortgage mess, rising energy prices, and rising food prices. That last item is the most maddening, because surging food prices are largely the result of the ethanol scam.

As U.S. ethanol distilleries vacuum up ever increasing quantities of corn, and corn takes up an ever larger percentage of arable land, prices for all types of food are skyrocketing. During the last two years, corn prices have more than doubled and soybean prices have nearly tripled. In 2007 food prices in the U.S. increased by nearly 5 percent. Bill Lapp, of the Omaha-based research firm Advanced Economic Solutions, told The Boston Globe in March that he expects food prices to increase at an annual rate of 7.5 percent for the next five years.

Because of mandates requiring gasoline producers to mix ethanol with their fuel, 20 percent of the U.S. corn crop in 2006—about 2.1 billion bushels—was diverted into ethanol production. By 2009, according to the National Corn Growers Association, about one-third of the expected crop—some 4 billion bushels—will be used to make motor fuel. And those projections were made in April 2007, eight months before Congress passed the Energy Independence and Security Act of 2007, which requires the consumption of 36 billion gallons of ethanol by 2020, a fivefold increase over current levels.

The far-reaching economic impact of ethanol mandates is already being felt. In early 2007, tens of thousands of people marched in the streets of Mexico City to protest the rising cost of tortillas, an increase that Mexico’s secretary of economy, Eduardo Sojo, blamed on American corn ethanol production. In March of this year, Pilgrim’s Pride, the world’s largest poultry processor, shuttered a plant in Siler City, North Carolina, and fired 1,100 workers. Company CEO Clint Rivers laid the blame squarely on the ethanol mandates, predicting that “there is much more to come” in the way of food price increases. “We’re spending our tax dollars to raise the price of our food to subsidize the ethanol industry,” he said.

Congressional meddling in the energy market has created what Lester Brown, the president of the Earth Policy Institute, calls an “epic competition” between “the world’s supermarkets and its service stations.” Therein lies the perversity of ethanol mandates: As the global economy heads for rougher times, food prices are soaring. And those prices will increase anxiety among consumers, who will further reduce their discretionary spending. Congress has created a negative feedback loop that will reverberate for years to come.

Robert Bryce is the managing editor of Energy Tribune. His latest book is Gusher of Lies: The Dangerous Delusions of “Energy Independence” (PublicAffairs).

War Is the Health of the Civilian State
Robert Higgs
Adam Smith famously observed that there is “a great deal of ruin in a nation”—that is, nations can take a lot of abuse. Let’s hope he was right, because the George W. Bush administration has taken a great many actions during the past seven years that contribute to economic ruin.

Much of the White House’s faulty economic policy can be traced to its wars in Afghanistan and Iraq, especially the latter because it has been larger, costlier, and more diverting. I use the word diverting deliberately to emphasize that the government’s military adventures in southwest Asia have served to draw the public’s attention away from economic measures that otherwise would have attracted more notice and hence more resistance.

One reason war is always associated with especially rapid growth in the size, scope, and power of the state is that it focuses people’s attention on what is seen as the most urgent matter, so they simply don’t notice what the government is doing in other areas. Another reason is that during wartime many people increase their broad support for the government and are less inclined to challenge its actions even when those actions have little or nothing to do with the war.

Hardly anyone was surprised that real military spending (measured in accordance with the government’s own narrow definition) increased by almost 60 percent between 2000 and 2007, compared to real GDP growth of 18 percent during that time. Note, however, that the government’s real nondefense outlays increased concurrently by more than 24 percent—an increase one-third greater than that of GDP. When people let down their guard in “supporting the troops,” they permit the government to make greater headway in its ceaseless quest to enlarge spending in a wide range of areas, many of them strictly civilian in nature.

The administration has partially concealed the burden of its spending binge by resorting to deficit finance. Federal debt held by the public increased by 49 percent between the end of fiscal 2000 and the end of fiscal 2007—a 24 percent increase after adjusting for inflation. To facilitate this surge in public borrowing, the Federal Reserve engineered a 40 percent increase in the monetary base, easing credit conditions in the commercial banking sector. The real estate bubble (now bursting) and the substantial depreciation of the dollar’s international exchange value are but two of the consequences of these reckless, war-spawned fiscal and monetary policies.

In view of the plunging stock market, my guess is that the current recession—in which many of the easy-credit-induced malinvestments of the past seven years are being liquidated by means of write-offs, loan defaults, bankruptcies, and other asset forfeitures—has much further to run. If you like the present worsening economic situation, write the president and your congressional representatives a letter and thank them for their war and their related economic spoliation.

Robert Higgs, a senior fellow in political economy at the Independent Institute, is author of Crisis and Leviathan: Critical Episodes in the Growth of American Government (Oxford University Press) and many other books.

Stagflation or Depression?
Robert E. Wright
The current U.S. economic outlook is as bleak as it was in 1974 or even 1930. Will the economy wither? Or will it just wilt a little before blossoming in a bath of Fed-supplied liquidity? Nobody knows for sure, but I fear the former. Here’s why:

Our educational system does a poor job of teaching people how to think independently. It always has, but until recently that wasn’t a big problem. Today’s globalized economy, however, demands ever larger numbers of engineers, doctors, scientists, and sundry creative types. We probably won’t create enough independent thinkers until we have school choice at the primary, secondary, and tertiary levels.

Thankfully, entrepreneurs abound. They’ve pulled us out of the economic fire in the past and could do so again. But they are more hamstrung than ever with high, uncertain, and often capricious taxes and regulations that do not appear to be going away anytime soon.

Something stinks in our financial system. Six different mortgage securitization schemes blew up between the Civil War and World War II for exactly the same reason that subprime mortgages tanked last year: very poorly designed incentives for mortgage originators. Why don’t financiers and their regulators pay more attention to America’s rich financial heritage? Their modeling is more sophisticated than ever, but their economic reasoning is not.

The national debt is so high ($9.4 trillion, or almost $31,000 per person) that the government must largely rely on monetary stimulus rather than more salubrious fiscal measures, such as permanently cutting taxes. Too much easing by the Fed could lead to 1970s-like inflation and further financial havoc.

Urged on in part by the example set by their profligate leaders, Americans wallow in a huge pile of private debt as well. A high level of individual leverage has become a permanent fixture of the nation’s landscape. Americans owe so much that to keep growing, financial institutions have to push the margin of safety by making loans on ever thinner collateral and ever weaker covenants. If the economy slows significantly, many more poor-quality loans will hit the proverbial fan. The ensuing mess will stink and take a long time to clean up.

Even if the Federal Reserve manages to save the economy this time, these problems may continue to fester, breeding the next economic catastrophe. Perhaps, though, even greater levels of incompetence in other countries will break our fall.

Robert E. Wright is the author of One Nation Under Debt: Hamilton, Jefferson and the History of What We Owe (McGraw-Hill) and a curator for the Museum of American Finance. He teaches business, economic, and financial history at New York University’s Stern School of Business.

The Only Thing to Fear Is Fear-Driven Government ‘Control’
Donald J. Boudreaux
New York Times columnist Gail Collins was underwhelmed by the president’s folksy course-things-ain’t-great-now-but-we-Americans-with-our-rebate-checks-and-incessant-complaining-about-congressional-earmarks-are-gonna-be-just-fine address to the Economic Club of New York on March 14. She complained that “in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control.”

This is the attitude that scares me. I worry not a whit that the subprime crisis or falling share prices will cause long-term economic woe. As unnerving as the current downturn might be today, people in competitive markets always find ways of regaining their economic footing tomorrow. Investors recalibrate their expectations and entrepreneurs redirect their energies to take better advantage of the changing economic landscape. Workers’ pay and consumers’ standard of living, after blipping briefly downward, resume their upward trend.

“Nonsense!” a chorus yells. “What about the Great Depression? Or the 1970s?” The experiences of these decades are indeed relevant. They are, however, precisely why the clamor for putting someone “in control” of this crisis is so frightening.

Contrary to the conventional wisdom, whose strength of empirical support rivals that for the flat-earth hypothesis (“It seems so obvious!”), the massive move toward centralized control of the economy during the administrations of both Herbert Hoover and Franklin Roosevelt did not “rescue” Americans from economic hardship. All that FDR’s soaring rhetoric and army of officials manning newly created alphabet-soup agencies managed to do was to prolong an economic downturn into America’s deepest and longest depression—one that showed no reliable signs of ending until after Roosevelt met his maker. As the economic historian Robert Higgs documents in his 2006 book Depression, War, and Cold War, investors were terrified by the very real risk during the 1930s that government would extend its control over the economy even beyond what it achieved with its New Deal programs.

The 1970s weren’t as bad as the 1930s. Most important, there was no serious talk during the ’70s of nationalizing industries or socializing investment decisions. International trade was expanding rather than being suffocated by a disco-era Smoot-Hawley tariff. Still, wage and price controls were in vogue (and in effect), Congress and Richard Nixon were keen on command-and-control regulations, and Fed chairmen Arthur Burns’ and G. William Miller’s control over the money supply was injuriously inflationary. Shot through with so many interventions giving government more “control,” the economy slipped into an infamous malaise.

My only fear, therefore, is fear itself—fear that deludes people into believing that giving government greater control is the key to earthly salvation. As I write these words, the Fed’s aggressive moves to bail out Bear Stearns and prevent other necessary market corrections—along with increasing public support for protectionism, anti-immigrant nativism, and environmental hysteria—send shivers down my spine. The threat of a long-term crisis is only as real as is the likelihood that government will try to exert more control.

Donald J. Boudreaux is a professor of economics at George Mason University.

Boo on That Mortgage Bailout!

gillespie@reason.com (Nick Gillespie) — Wed, 09 Apr 2008 20:13:00 EDT

Over at Rough Cut, the video blog of reason.tv, check out Mike Flynn saying to mortgage bailouts on CNBC's Task Force. Flynn is director of government affairs at Reason Foundation, the nonprofit that publishes the print and online editions of reason.

Click on the image below to hear a rollicking good argument against government intervention in the economy—for strapped homeowners and investment banks alot.

Who Wants to Bury a Billionaire?

jwalker@reason.com (Jesse Walker) — Tue, 08 Apr 2008 10:00:00 EDT

You can't sum up the entire sorry situation in Zimbabwe in just one sentence. But this one goes a long way:

Now the Reserve Bank of Zimbabwe has rewarded the people of Zimbabwe with a new $50 000 000.00 bank note to reduce the number of notes they have to carry around.

This picture might help, too:

The country faces an inflation rate of approximately 200,000 percent. One of the few saving graces: an extensive black market, which allows Zimbabweans access to more stable foreign currencies.

Confidence Game

matt.welch@reason.com (Matt Welch) — Mon, 17 Mar 2008 08:10:00 EDT

Bear Stearns becomes the latest financial institution deemed by the government as too big to fail. It clearly won't be the last. From the Washington Post:

J.P. Morgan was unwilling to assume the risk of many of Bear Stearns's mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments. [...]
Bear Stearns, in particular, was confronting a run on the bank as investors were too fearful of the future to make even overnight loans to the nation's fifth-largest investment firm. If it had been allowed to fail, senior officials believed, it would have created a cascading crisis of confidence that could well have brought down several other leading firms and dragged world markets with them.
Policymakers weighed that risk against the risk that their actions would create "moral hazard," or greater willingness of companies to take inappropriate chances.

Hard to believe that "moral hazard" is a serious concern, given that the Fed has now -- for the first time in history -- wrapped its security blanket around investment banks:

Since the central bank was created in 1913, it has served as a lender of last resort for ordinary banks, allowing them to post high-quality loans at a "discount window" in exchange for cash.
Last night, it announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning.

Sure is a bad time to have your savings in dollars!

In November 2006, Brian Doherty asked a bunch of economist types: Can we bank on the Federal Reserve?

Fueling Fuel Inflation

jwalker@reason.com (Jesse Walker) — Thu, 06 Mar 2008 09:27:00 EST

Jay Hancock blames the Fed for rising gas prices:

Lower interest rates have made things worse. Bernanke and the Federal Reserve have cut short-term rates by more than 2 percentage points since late summer to try to lower business costs and spur growth. That nudges investors to sell dollar-denominated paper and seek higher returns elsewhere.

Once the dollar was an automatic refuge, the first place international investors socked dough in uncertain times. Lately, however, the most popular safe harbor isn't the dollar, the Swiss franc or even the euro. It's energy.

People are piling into oil and gas futures, probably with money they raised by dumping dollar-denominated stocks and bonds. Oil investments are seen as protection against further dollar declines.

Bernanke's lower rates have fueled the trend by furnishing cheap funds for investors to spend on the New York Mercantile Exchange. So he's simultaneously hurting the greenback and driving up gas prices -- even though inventories are at a six-year high. That won't help the economy recover.

Energy may be the next bubble investment. Each time the Fed breathes life into the economy with lower rates, the extra money floods into some fad asset -- first Internet stocks, then housing, now oil?

The whole argument is here.

Of Gold and Empire

bdoherty@reason.com (Brian Doherty) — Thu, 28 Feb 2008 10:46:00 EST

For those confused by the linkage between two of Ron Paul's major issues--antiwar and pro-gold--economist Steve Horwitz explains the connection in the January/February issue of The Freeman with a historical review of the links between federal intervention in the currency system and war.

Some excerpts that tell the tale:

Governments that can either create money directly or use regulation to force banks to provide the resources will be able to conduct war more often and with less political resistance than those that cannot.
.......
In 1863 the federal (Union) government for the first time offered charters for individual banks. With charters came regulations, one of which was the requirement that bank-issued currency be backed with U.S. government bonds. Whenever a federally chartered bank wanted to give its customers paper currency, it had to purchase such bonds, whose face value slightly exceeded the value of the currency and then present them to the Comptroller of the Currency in Washington, who then printed the bank’s notes......Interestingly, when the federal government first offered the charters, almost no banks signed up; they kept their state charters because the federal charters offered no advantages and some minor disadvantages. Not content to lose that way of financing the war, Congress quickly passed a 10 percent tax on the banknotes of state-chartered banks..... Between the original bond-collateral requirements and punitive tax on the state-chartered banks, the federal government used its power over the monetary system to ensure a market for bonds to pay for the Civil War.
............
The Johnson administration made a conscious decision to finance the Vietnam War
through inflation rather than higher taxes....At the time Federal Reserve Notes held by foreign central banks were still redeemable in gold at the Fed. As a result of the inflation (depreciating dollar) of the late 1960s, the Fed saw a massive flow back of Federal Reserve Notes from foreign governments, which began to reduce U.S. gold holdings. This drain of gold reserves led President Nixon to close the “gold window” in 1971, breaking the last remaining link between the dollar and gold. With excess supplies of money no longer generating any direct negative economic consequences for the Fed, the even-greater inflation and macroeconomic disorder that characterized the rest of the 1970s and ’80s were no surprise.
Thus the need to finance the Vietnam War led to increased government control over money, which led to macroeconomic disorder (much as we saw in the late nineteenth-century banking panics), which in turn led to calls for more government intervention.

A reason roundtable on the Federal Reserve in the Bernanke era, featuring Milton Friedman and Ron Paul, among others.

Horwitz reviewed Theodore Burczak's Socialism After Hayek in reason's July 2007 issue.

Everything Still Turns to Gold

bdoherty@reason.com (Brian Doherty) — Mon, 25 Feb 2008 10:45:00 EST

Ron Paul associate, old libertarian movement hand, and retired coin dealer Burt Blumert is profiled at the San Francisco Chronicle's website. An excerpt:

Precious-metal prices tend to increase in times of economic uncertainty and a weakened U.S. dollar. And this inverse relationship is key to understanding Blumert's reference to gold dealers' dismal view of the future. To a philosophical goldbug, when the price of their commodity increases, it's a sign that the global economy is tanking. Inflation is proof that the fiat money system is an illusion — and an affirmation that, in the portentous, Arthurian terms of a recent book by Nathan Lewis, gold is The Once and Future Money.
But — and here's the paradox — for the goldbug's worldview to be finally vindicated, the fiat money system has to collapse. "Many of my clients would like to be standing in the rubble of our society saying, 'I told you so,'" Blumert says. "And there was a time when I did want collapse — when I was young and excited about my view. But the older I get, personally I can't deal with rubble anymore. I don't want to see a collapse, to be vindicated and say, 'See, I was right.'"

My reason interview with Nathan Lewis, mentioned in the above excerpt, on gold. Recent goldblogging from Matt Welch.

The Minute Standard

jwalker@reason.com (Jesse Walker) — Thu, 17 Jan 2008 15:31:00 EST

A free-market currency of sorts emerges in Kenya's post-electoral wreckage:

Kenyan phone users do not have monthly phone plans; they pay for prepaid credits (like most of the world). Prior to the election, getting credits was easy -- they were available in kiosks, stores, bars, anywhere you could imagine. Yet, these venues all closed shop after the election because of the violence and looting. Credits have become a rare commodity and the price has skyrocketed. Credits have also turned into a currency and people are trading credits for food and medicine. Credits are worth more than the government's currency. Because of difficulties in getting credits to citizens, a service called Pyramid of Peace has popped up to help people send credits to Kenyans.

For more on grassroots activism in Kenya, see this excellent roundup at Global Voices Online.

Bonus link: R.A. Radford's classic account of cigarettes evolving into money in World War II POW camps.

Ron Paul and The Political Economy of Money

bdoherty@reason.com (Brian Doherty) — Thu, 20 Dec 2007 08:57:00 EST

You might have noticed journalist (and Giuliani foreign policy advisory team member--not too hard to guess what that advice mostly consists of--"end evil, boss!") David Frum accusing Ron Paul (and Huckabee, another opponent of his boy Rudy) of being an ignorant nimrod when it comes to monetary policy in the National Post. An excerpt:

Just a little lower down in the polls is a libertarian candidate named Ron Paul. Paul is best known for his vehemently isolationist foreign policy views. But his core supporters also thrill to his self-taught monetary views, which amount to a rejection of everything taught by modern economists from Alfred Marshall to Milton Friedman.
Huckabee and Paul have not the faintest idea of what they are talking about. The problem is not that their answers are wrong -- that can happen to anyone. The problem is that they don't understand the questions, and are too lazy or too arrogant to learn. But say that aloud and their partisans will shout back: Elitism!

Actual economist Peter Boettke takes on Frum on this issue at the Austrian Economists blog. An excerpt:

Friedman and the gold standard advocates share a fundamental bond ---- inflation is destructive to an economy and ultimately to a civilization. Good policy must fight inflation.
................

Pundits like Frum believe that economic policy can be designed to avoid the unpleasant side effects of previous policy errors. But there isn't any silver bullet here to provide a quick and easy fix to decades of monetary irresponsibility. As I said before, we don't need government intervention, we need market correction. Market forces, if allowed to operate freely, will work quickly to reallocate labor and capital and shift resources to higher valued uses.........As Milton Friedman said, we have been misled by false teaching in economics to believe that there is a trade-off between inflation and unemployment. This dichotomy is false. The choice is not between inflation and unemployment, but between high unemployment as a result of inflation, or unemployment as a temporary side-effect of the cure for inflation. Playing the policy game of always pushing off market corrections through easy money, is as Hayek warned like holding a 'tiger by the tail'.

Right at the time that David Frum is ridiculing Ron Paul's for holding economic ideas that have been rejected from the time of Marshall to Friedman, we learn that the European Central Bank is injecting $500 billion into the banking system to ease the market corrections that must result from the previous credit expansion. That tiger is getting awful hard to hang on to!!!

And, Mr. Frum should look up the various Nobel Prize winners in economics, starting with Hayek, who have been concerned with government monetary policy and looked to a commodity backed money as a viable alternative. The 'self-taught' economics of Ron Paul (whatever other problems I might have with him and his presentation of these ideas) is grounded in sound scientific economics. An understanding of the logic of human action, the coordinating capacity of the market economy, the problems with bureaucracy, the special pleading of interest groups, and the destructive capacity of inflation are fundamental to his economic policy message. I hope my students learn those lessons from reading Adam Smith, David Hume, J. B. Say, F. A. Hayek, and James Buchanan. None of these names are on the 'crackpot' list of economists.

Remembering 'The Forgotten Man'

gillespie@reason.com (Nick Gillespie) — Tue, 18 Dec 2007 15:15:00 EST

With the possible exception of the Civil War, no event has transformed American politics more fully than the Great Depression. From the stock market crash of 1929 through U.S. entry into World War II, the country’s economy floundered tragically, with the unemployment rate typically in the high teens. First under the misguided and generally ineffective policies of President Herbert Hoover and later under those of Franklin Delano Roosevelt, the federal government became increasingly interventionist, at times attempting to dictate all aspects of economic production.

When accepting the Democratic Party’s presidential nomination in 1932, Roosevelt proclaimed “a new deal” for the American people. Once in office, he began radically transforming the federal government while seeking to ameliorate the nation’s woes. He pushed subsidies for farmers, changed the banking system, and created the National Recovery Administration, which regulated many aspects of business until it was declared unconstitutional in 1935. Through the creation of the Social Security system and related programs, Roosevelt vastly expanded the scope and size of the federal government and created the political world in which we live. The shift was so complete that even as vocal a foe of big government as Ronald Reagan, who started his political career as a New Deal Democrat, approvingly wrote to Congress in the early 1980s of the “nation’s ironclad commitment to Social Security” and praised FDR’s visionary leadership in creating the program.

In her meticulously researched new history of the Depression, The Forgotten Man (HarperCollins), journalist Amity Shlaes describes the received catechism of the era: “Roosevelt made things better by taking charge. His New Deal inspired and tided the country over. In this way, the country fended off revolution of the sort bringing down Europe. Without the New Deal, we would all have been lost.…The attitude is that the New Deal is the best model we have for what government must do for weak members of society, in both times of crises and times of stability.” But that conventional account, she writes, fails to capture “the realities of the period.” Shlaes shows how both Hoover and Roosevelt “overestimated the value of government planning” and intensified and prolonged the very problems they were seeking to fix.

Told in a rich narrative style, The Forgotten Man follows dozens of historical figures through the Depression, weaving the stories of people as varied as American Civil Liberties Union co-founder Roger Baldwin, Alcoholics Anonymous creator Bill Wilson, power utility magnate (and failed presidential candidate) Wendell Willkie, and African-American evangelist Father Divine into a rich human tapestry. In this, the book calls to mind one of the Depression’s landmark literary texts, John Dos Passos’ U.S.A. trilogy (1930–36).

Shlaes is a columnist for Bloomberg and a senior fellow at the Council on Foreign Relations. A former member of the editorial board at The Wall Street Journal, she is also the author of The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It (2000) and Germany: The Empire Within (1991).

In June she was interviewed on C-SPAN’s After Words program by reason Editor-in-Chief Nick Gillespie. What follows is an edited transcript of that program, which can be viewed online at reason.tv. Comments can be sent to letters@reason.com.

reason: Your book is subtitled “a new history of the Great Depression.” What’s new about your take?

Amity Shlaes: One of the important things about the existing argument is that it’s all about Keynesianism, about whether government spending can cure the economy when it’s ill. Scholars have overlooked the cost of uncertainty in an economy, what we would now call the “unknown unknowns.” Both the Hoover and Roosevelt administrations (but especially the Roosevelt administration) were so unpredictable. That hurt the economy very much, and when I went back and saw the extent I was astounded. Uncertainty is a factor that I thought needed to be explored. There were lots of people who said, “I will not invest ’til I know what’s going to happen.”

During the Depression, you heard the phrase “bold, persistent experimentation” all the time. We’ve been taught that was good. Somebody had to do something, was what we learned. But what I saw was this enormous cost, especially during the second half of the 1930s.

There’s a second thing too. I look at the government’s action using the lens of public choice theory. Very simply, public choice says that government is no better or worse than a business, it’s a competitor. Sometimes I use a crustacean image; The government is like a lobster. It will eat anything, it wants to survive, it will compete with anything, and it can be a cannibal. When you look back at the ’30s using the public choice lens, what you discover is the extent to which the Depression wasn’t about a virtuous government and bad business people. Rather, it was about people in office competing with the private sector for power. Much of the struggle described in the book literally inhered in the power business: utilities. There’s something about power that attracts strong people. And of course the government wins and the private sector loses in the form of the Tennessee Valley Authority, which was created in 1933.

reason: Where does your title, The Forgotten Man, come from?

Shlaes: In 1932, on a radio program called The Lucky Strike Hour, Franklin Roosevelt gave a speech that was written in part by Ray Moley, his adviser. Moley was a man you’d want to have at your dinner table today. He was a wonderful, wonderful man. In that speech Roosevelt spoke of the “forgotten man at the bottom of the economic pyramid.” Moley wrote to his sister that he wasn’t quite sure where he had gotten the phrase, but it was in the air.

In the late 19th century, there was a book, a collection of essays, called The Forgotten Man and a famous lecture called “The Forgotten Man.” The author was a Yale professor called William Graham Sumner, who had quite a different forgotten man in mind. He put it algebraically. Sumner said a wants to help x, with x being the man at the bottom. And b wants to help x too. That’s our philanthropic impulse, we want to help. There’s nothing wrong with that. We all have that impulse to provide charity. It becomes a problem when a and b get together and pass a perhaps-dubious law that coerces c into funding their maybe-good project for x. In Sumner’s original version, c is the forgotten man, the man who pays, the man who prays, the man who is not thought of.

That phrase meant a lot to people at the time, and when Roosevelt people debated Hoover people they were all familiar with William Graham Sumner. So [Roosevelt’s supporters] said, “You have the wrong forgotten man! The forgotten man is the man waiting for the recovery that you are not delivering or that you are preventing.”

I think Sumner’s concept of the forgotten man also has to do with today. When you talk about the upcoming presidential election, you see great powerhouses, the Democratic powerhouse (Hillary Clinton) and the Republican powerhouse (maybe McCain, maybe someone else). And the individual voter says, “Where do I fit into this? I feel like the forgotten man.” There’s something very un-fun about this election as it’s beginning to unfold. Given our challenges with the funding of entitlement programs, the forgotten man in the future will be the generation who will pay for what Roosevelt created during the Depression.

reason: You note that there were similarities between Hoover and Roosevelt, at least in the early stages of dealing with the Depression. Obviously, FDR was a lot more successful as a politician, but he and Hoover shared certain types of mentalities and even certain policy inclinations. Talk about what Hoover did wrong and how Roosevelt built on that.

Shlaes: Hoover was a good man, and electing him was like electing Bill Gates or Mike Bloomberg, or electing some other capitalist figure as president. In 1928 the country said, “We want a businessman to rationalize our country.” There was nothing wrong with some aspects of that, but Hoover had the wrong temperament. He had been Coolidge’s secretary of commerce and he did have an enormous talent for organizing humanitarian efforts, such as the relief effort for the Great Flood of 1927, which ravaged areas along the Mississippi River. Before that, he’d been very successful in business. The voters thought, “Let’s get somebody from the private sector as president and bring that success to government.” But government is a different animal than the private sector. Hoover was an engineer. He was a control freak. He would rather have control than do what was right. That’s a harsh thing to say, but you see it happening over and over again.

When the stock market crashed in 1929, he did some bad things. One was he called business leaders together and said, “Don’t drop wages or prices.” He didn’t give business a free rein to handle the downturn. In 1930 he signed the Smoot-Hawley Tariff, which raised tariffs to historically high levels. That sent a terrible international signal.

It was in the Republican Party’s platform to like tariffs; Republicans liked tariffs at that point. It was wrong, but they did. They thought a high tariff was good for business. It’s not good for business generally; it’s just good for the certain businessman who has the influence with politicians.

Hoover probably knew better. He had lived in London; he had lived in Asia. He was a man who had generated significant economic growth in his businesses. He had a thousand professors—even some from his own university, Stanford—write to him saying, “Don’t sign this tariff; it’s bad.” And yet he signed it.

Hoover does get blamed for something that he doesn’t deserve. People today say, “Oh, he ought to have spent as a Keynesian would, and the government would have made the economy grow.” We want to remember that the government was very small when he was president. The federal government was smaller than state and local governments at the time. It spent something like the equivalent of 2 percent or 3 percent of gross domestic product. Now it’s 18 percent to 20 percent.

reason: What was happening at the Federal Reserve?

Shlaes: The Fed was young. It had only been founded in the 1910s. They didn’t really know what they were doing. Neither Roosevelt nor Hoover understood that the country was in a deflation, that they were having a money drought. Bank problems were a large factor too. I don’t think they really understood what was going on with money or that you could create more money. They were in the gold standard culture. But there was a professor whom I came to know and like in the period, Irving Fisher. He would go around and say, basically, “There must be more money!”

Some towns realized this. They made their own money. They manufactured it. In the book, you can see pictures of the scrip that they created. It often had a moral component. In Salt Lake City, they had a currency called the “valor.”

The Fed should have made money easier to obtain. The concept that we have today—much of this book is history, not economics—of open market economics, where the government buys bonds or sells bonds to soak up money from the economy, was not especially developed at that time. And the gold standard functioned differently anyhow. If you want to make an argument against the gold standard, this is the example. The Depression was the Hurricane Katrina of gold standard policy. The absolute worst picture you can get of the gold standard is this period, because people did go hungry.

reason: Hoover had a terrible four years and got smoked in the ’32 election by FDR, who, among other things, also lifted Prohibition.

Shlaes: Right. That was part of the sale, the knowledge that Roosevelt would do that. He always had a gift for the voters. In the ’32 election, he gave liquor. (And there were significant revenues that came with legalizing liquor.) In the ’36 election, he gave spending.

He also created the Securities and Exchange Commission, which I’m generally in favor of. This is not a totally libertarian book. I think it’s OK to have the Fed and OK to have the SEC and OK to have clear rules in the game.

reason: Because they limit the uncertainty, which in the end is worse than even a bad policy that’s certain?

Shlaes: Yes. But there were other things that he did in his first 100 days, and that was the problem. Central to it was changing the economics of agriculture and saying, “We will pay you not to produce. We will limit supply, either by plowing under or limiting acreage”—that sort of thing.

reason: Where did his farm policy come from? FDR always talked about helping people, but what he did was actually set price floors at a time when people were going hungry. This isn’t exactly what the typical FDR devotee fully understands.

Shlaes: Well, the interest group was the farmers. Roosevelt was elected in part by the farm vote. They wanted the kind of high prices they had had before World War I. They had a significant drop in their prices, something on the order of 30 percent to 40 percent. Looking back, we might say that more of America should have moved to the city faster, which is what they did eventually anyhow.

He put Henry Wallace, a figure they knew, in as agriculture secretary. The administration made a bunch of rules. They put in a tax on middlemen, on the theory that that would help the farmers and that middlemen got in the way of efficiency rather than helped efficiency, which is what we think today.

Then there was an analogous beast in the business sphere called the National Industrial Recovery Act, which created the National Recovery Administration and which had a whole bunch of philosophies behind it, copying a little bit from Britain, copying definitely the German cartel system, and copying what Stalin was doing.

Roosevelt’s advisers didn’t know Stalin was a monster, or at least not so much, and very naively they copied him. In the book I trace how some of the characters go to the Soviet Union in 1927 and are bowled over by Stalin. They get six hours with him and they come back and you see them, especially [former Columbia University professor] Rex Tugwell, implementing things they learned from fascist Italy or from the world of Stalin. The influence of these European entities from Russia to Italy was not parenthetical. These people were not working for Moscow, but they were influenced by Moscow.

One of the members of the junket was a very well-known writer named Stuart Chase, an accountant who wrote about economics. He wrote a book called The New Deal, and it appeared in 1932, and that’s where Roosevelt got the phrase. The last sentence of Chase’s book is, “Why should Russians have all the fun remaking a world?” So you see the continuity.

There was a romance with the economy of scale, and not just in America. FDR’s advisers said that having so many different states and so many different ways of doing things was inefficient. If you had 50 flowers blooming, as federalists would have, they bloom differently and it makes for a messy garden. There was this sense that the economy couldn’t grow further unless there was rationalization, standardization. Even now you’ll see businessmen fighting for standardization: “Just make the rule!” they say.

reason: You follow Tugwell, who was born in 1891 and died in 1979, through the book. In many ways, he emerges as the paradigmatic New Dealer. Tell his story.

Shlaes: I liked Tugwell very much because he was honest. He loved Roosevelt and Roosevelt loved him, but The Forgotten Man is also a book about policy agony. It’s about what happens when you go into government and you do your best and you’re not appreciated and the thing that you produced is not what you planned and nobody cares.

Tugwell worked in the Department of Agriculture. He became part of something called the Resettlement Administration, where they moved people around—as described by John Steinbeck in various works. Tugwell saw a lot of poverty, the Dust Bowl, and so on. He saw that a lot of the projects weren’t really working. Some worked: Fertilizer worked, and so did money so farms wouldn’t have to be sold or closed. But a lot of it didn’t work and he had a lot of ambivalence.

He made planned communities, such as Greenbelt, Maryland, and he cozied up to Eleanor Roosevelt. They drank champagne made in New York state, which Roosevelt thought was awful and it probably was.

And then they kind of threw him out. But not before he had laid the plans for his own little Soviet farm, which was in Casa Grande, Arizona. He put settlers in to make a town; he gave them houses. There were people like the migrant workers in the photographs. These were people with nothing. They signed up for the town, and they were supposed to work together and have economies of scale and just one tractor they could share.

What’s wonderful is that Tugwell was honest about it and admitted it wasn’t working. Later, he discovered that the settlers in the little farm hadn’t worked together, that they had fought, that they had trashed the community house. They wanted milking machines, for example, which is a completely rational thing to want since it increases productivity. But the authorities didn’t want them because part of the thesis was that you should be creating jobs, and you take away a job when you have a machine.

All these fallacies were underlying everything, and Tugwell saw that too. He tried to go back to Columbia and they wouldn’t have him, even though he had an apartment on Riverside Drive. So he kind of went around in the private sector and eventually did get his reward: He became governor of Puerto Rico, where he encouraged land reform that had too much of an aspect of appropriation for my taste. And then he spent a lot of years trying to rewrite the Constitution, because he concluded the New Deal had failed because of the Constitution. If only we had a more modern constitution, he thought.

reason: You write that an economist of the time lambasted the NRA as the National Retardation Affair. It was also often derided as Nuts Running America. Effectively, it was an attempt to oversee virtually all aspects of the economy. How did it play out?

Shlaes: With Roosevelt in the White House, America was supposed to be about the little man, the forgotten man. But this was a cartel arrangement, or close to it, where big companies wrote codes that made it hard for little companies to survive.

In the ’30s a right-wing think tank had a look at the NRA, which was a whole bunch of rules in every state, a sort of mixture of government and industry where industry was supposedly self-governing but not really. And this big right-wing think tank concluded after a thousand pages that the NRA was retarding recovery. The name of that think tank was the Brookings Institution. Roosevelt had people from all quarters telling him that this isn’t working, and it was eventually challenged in the Supreme Court, lost, and had to be disbanded. The rules for agriculture, of course, are still with us.

In retrospect it was wonderful that the Supreme Court said no National Recovery Administration for the business sector. Parts of it were reincarnated later. Many of the labor components, for instance, came back as the Wagner Act. But the governing-the-economy-by-rules thing didn’t come back quite the same way.

reason: One of the most important stories you tell is about the family butchers who helped kill the NRA.

Shlaes: The Schechter brothers ran a small chicken slaughter business; they were kosher butchers in Brooklyn. They were prosecuted by the Justice Department under the NRA. They were the case that was picked by the government to go to the Supreme Court to prove the constitutionality of the NRA. I thought that this was a wonderful story, and we never learned it in school because it was against FDR. But it was an important, important story.

The Commerce Clause limits what the federal government can do in the states. The laws have to pertain to interstate commerce. What is interstate commerce, and did the NRA breach that? Everyone knew there needed to be a test. So this chicken business was picked because in another case chickens had been defined as interstate commerce.

The Schechters were prosecuted very nastily, for a lot of sins. Lowering prices, that was illegal. Working too many hours, that was bad, bad. Competing. What I liked about them was that they were furious. They realized that what the government was saying was wrong. To them it seemed probably like the czar’s Russia, where their family had come from.

The government’s lawyers talked down to them. The lawyers kept saying things like, “You’re not an economist; you don’t have any agricultural economics.” And they would say, “No, I don’t have much school; I barely speak English”—their English was mocked. But when they got to the Supreme Court, their argument won because of the logic.

Their lawyer said, “One of the rules of the NRA is that the customer may not pick his chicken. America’s about customer choice.” This was a time when there was still tuberculosis and no antibiotics. Picking your own chicken was important for health reasons. You didn’t want a sick chicken—their case is known as the “Sick Chicken Case”—and the justices sided with the Schechters. They said, “This is delegation run riot, what about the Commerce Clause,” and so on.

There was a lot of discussion around that, and it was an enormous event because if the NRA had stood, we’d have the same kind of intervention in business as we have in agriculture. So it shifted America forever.

reason: What do we gain from a study of the Depression, particularly a revisionist understanding of it?

Shlaes: One lesson is that you do not need to mess with the economy for it to recover. In fact, messing with the economy can retard recovery. You do not need to go into war mode—the NRA was headed by an actual general, Gen. Hugh Johnson—when there is a downturn. The economy has a lot of inherent strength, and there’s plenty of evidence that it would have recovered much sooner—maybe by 1936—had Roosevelt not asked for the mandate of “unimagined power” to change everything in his second inaugural address.

reason: It wouldn’t go over well today to say that as president you want “unimagined power.” At least, not so openly. Isn’t there a strange paradox at work in American politics? We have a much better understanding of economics and of how government interventions often have unintended, and usually negative, consequences. Free market ideas really triumphed in the second half of the 20th century. Yet as a percentage of the economy, government spending is far greater than it was during the Depression.

Shlaes: That challenge of two opposing ideas is one reason I wrote the book. The most important thing for our generation is that the New Deal will come back to bite our children when they pay yet higher payroll taxes because we did not dare to reform Social Security and other entitlements. There are not enough people to pay for Social Security, and Social Security is set up so that you can’t fix it just by growing the economy.

This is a moment of choice for us, our generation and the younger people. We have to look again at Roosevelt. Roosevelt was inspiring. He was right on World War II, but we do not have to have false nostalgia for his wrongheaded policies in the ’30s. We should warn our children and help to change Social Security, but you don’t see that in the presidential candidates. You don’t see daring on Social Security.

I’m an old-fashioned liberal, and a lot of this book is about the death of that kind of liberalism—liberalism in the European sense. I’m the sort of liberal who cares a lot about the individual, the forgotten man; I emphasize that rather than the group or the aggregate. My very first job was at The New Republic, where I wrote an article that parents shouldn’t know when girls under 18 had abortions. It was called “The Squeal Squad.” That was the liberal in me. It was, “Leave me alone, even if I’m a child.”

I have great faith in the individual, and I think it’s time for a re-evaluation of the [term] liberal in America. The Republicans were wrong to try to smear Democrats with that word. Ronald Reagan was right when he said it is a good word. Democrats and Republicans should both use it, and we should re-examine traditional liberalism if we can.