The 1920s: Bubble, Growth, or Gold?

This session was part of the CFR Symposium on a Second Look at the Great Depression and the New Deal, cosponsored by Dean Thomas Cooley of the Leonard N. Stern School of Business, New York University, and supported by a special grant from the Ewing Marion Kauffman Foundation.

This session was part of the CFR Symposium on a Second Look at the Great Depression and the New Deal, cosponsored by Dean Thomas Cooley of the Leonard N. Stern School of Business, New York University, and supported by a special grant from the Ewing Marion Kauffman Foundation.

RICHARD N. HAASS (president, Council on Foreign Relations): Well, good morning. I want to give a warm welcome to everyone here. I'm Richard Haass. I'm president of the Council on Foreign Relations. And I want to thank everyone for coming to this symposium with the title "A Second Look at the Great Depression and the New Deal." It's a special event for many reasons, but in no small part because we have a co-host, Dean Thomas Cooley of NYU's Stern School of Business.

Just to let people know the ground rules, this event is on the record, or essentially you've waived your Miranda rights.

It's clear that the United States and the world are in a recession by the commonly used measure of two consecutive quarters of contraction. It's not yet clear whether we are in or heading toward a depression, in part because there's no accepted definition. A depression may just be one of those things for which we have to use Potter Stewart's principle that one knows it when one sees it.

But regardless of whether we actually come to see the current economic crisis as a depression or something else, this is clearly more than your run-of-the-mill downturn. It's one of those discontinuities in history, one with consequences likely to be deep and enduring.

It's natural, then, in such a situation to do the sort of thing we are doing here today. It's natural to ask whether history in fact does offer some do's and don'ts for those of us dealing with the present. The last time the United States experienced an economic crisis of this magnitude was in the 1930s, and the question is, what lessons does this decade have to offer, both from positive examples of government action and from negative examples, some sins of omission, sins of commission. Some things were tried that went well, others were not tried that should have been, and still others were tried that turned out badly.

And what we have today is an extraordinary series of distinguished experts who will look at all of this and think about how we might -- what lessons there are to be learned and how we might apply them.

As you've already gathered, I am not an economist. But even so, I truly believe this topic is essential given the situation we are facing, in part because it goes well beyond economics.

In my view, the current global crisis was not inevitable. It was the result of flawed policies, of poor decisions and questionable behavior. And therefore the lesson is not that market economies should be avoided; the problem lies with the practice of capitalism, not the model itself.

However, if that's correct, the crisis will still have consequences for capitalism and its appeal in societies around the world. And the degree to which the capitalist model will be seen as attractive depends in part on how quickly the United States and the world are able to recover. And an inability to mount an effective recovery will discredit capitalism and those who embrace it, with potentially wide implications for the openness and prosperity of society. So the stakes are hard to exaggerate. And that, again, is why today's event is so important.

So we're pleased to have a wide range of views here from different schools of thought. We here at the council work hard to maintain a forum in which diverse ideas on the central issues of the day are and can be debated and discussed. And this symposium is part and parcel of that.

It's not the only thing we're doing on this set of subjects here at the Council on Foreign Relations. We have new council special reports, published just this last week, on lessons learned from the financial crisis and on global financial imbalances. Both of these reports are somewhere out here. We also have a forthcoming crisis guide on the economic situation, and this award Emmy-award-winning series offers an online, interactive, multimedia presentation of the history and the background of the world's most complex crisis. We also have a "Global Economy in Crisis" page on our website, cfr.org.

Today's event, as I noted, is generously cosponsored by the Leonard N. Stern School of Business, for business at NYU. And a special thanks goes to Tom Cooley for his participation in not simply today but more the preparations leading up to today.

Today's symposium was also made possible in part by the Ewing Marion Kauffman Foundation, and I'd like to thank Carl Schramm, who will be with us later today, for his special role in this.

Lastly, I'd like to thank Amity Shlaes, who's here at the Council on Foreign Relations, who inspired this symposium, and to our director of the Center for Geoeconomic Studies, Sebastian Mallaby, and Benn Steil, a senior fellow here, who worked with her on it.

So now let me turn things over to Bob Rubin, who, among his many claims to fame, we like to think the most important is that he is co- chair of the Council on Foreign Relations.

Robert? (Applause.)

ROBERT E. RUBIN: Thank you, Richard.

Every time I hear Richard talk about economics, it reminds me he's a foreign affairs specialist. (Laughter.) At any rate, be that as it may, I am Bob Rubin, as Richard correctly said, and I'll add my welcome to Richard's to today's event.

I'm going to moderate the first session. The first session, as you know, is entitled, wrongly entitled, I might add, "1929: Bubble, Growth or Gold?" The session will last about an hour and 15 minutes. We'll have five minutes' presentation each or roughly that by our panelists.

Then there will be roughly 20 minutes of moderated discussion, if you will, in which I'll pose some questions, one of which I think is somewhat inappropriate. And we'll have to see how people answer it. And then the balance of our time will be spent on discussion with you all.

We have a truly distinguished panel. I'm not going to repeat the resumes. It's in your material. Let me just make a brief comment on each.

Michael Bordo is professor of Economics and director, Center for Monetary and Financial History at Rutgers University. I was reading something, over the weekend, which referred to him as a master of monetary policy.

(Cross talk, laughter.)

Richard Sylla, Dick Sylla, is the Henry Kaufman professor of the History of Financial Institutions and Markets and professor of Economics at NYU. Professor Sylla is the author of a definitive mainstream history of interest rates.

Benn Steil is director of International Economics, Council on Foreign Relations. And Benn, who is a very widely respected scholar on financial matters, has a brand new book with an unorthodox view on the gold standard, in relation to the Depression.

And finally we have Ed Prescott, chair of Economics, W.P. Carey School of Business, Arizona State University, and was the winner in 2004 of the Nobel Laureate in Economics. He has written a new book with the provocative title "Great Depressions." That's plural: "Great Depressions of the 20th Century." Hopefully our present experience will not add to the ending of that book.

Our session is going to focus on what occurred, in the 1920s, that contributed to the Crash of '29, October '29, and to the Great Depression that followed. And as many commentators have noted, although there's a general tendency to conflate the Crash and the Depression, the fact is, they were separate albeit probably related events, nevertheless separate.

Other panels will discuss or focus on the policies and the forces of the '30s that affected the Great Depression. But we're also going to venture into that territory to some extent.

One of the key questions of the Depression, as all of you probably know, is why the Depression was so much more severe and why it lasted so much longer in the United States than was the case in many other countries around the world.

And that certainly involves the factors in the '20s, the causes in the '20s that contributed to this. But it also involves the policies of the 1930s. And there's a great deal of debate about those policies. Which heightened the Depression? And which ameliorated the Depression? And I suspect we'll touch some on that in our panel.

I do think that this question -- we were talking beforehand a little bit. And somebody made the comment that economic historians have become very useful again, because of the current crisis.

I do think it is very important to understand the causes of the Great Depression, because that can help us try to think about and understand the causes of the current crisis. And I don't think there's any question that one needs to understand the causes of the current crisis in the process of crafting policy response. And similarly understanding the policies of the 1930s and the effects those policies had can help us craft policy today.

David Kennedy, in his Pulitzer Prize-winning book about the Depression, entitled "Freedom from Fear," said of the Depression, quote, "An unprecedented event, it must have extraordinary causes."

But as our series will show, and our particular session will show, there are widely different views still, 80 years later, as to what those extraordinary causes may have been: monetary policy and the separate related question of the gold standard, fiscal matters, bank policy, trade and so much else.

The only other observation I'll make before we proceed with our panel is that when you think about causes and you think about policy responses -- and I know this from dealing with the Mexican crisis and the Asian financial crisis of the '90s -- you need to think not only about substantive effects but also about the psychology and about confidence.

With that, let me now turn to our panel. Let me remind you to turn cell phones off. I think Richard may already have said that, or if he didn't, he should have.

Today's meeting is on the record, as Richard did say, and there will be participants around the country and around the world, through the technology of the Council on Foreign Relations, that will be watching via a password-protected teleconference.

And with that, we will turn to our panel, and who would like to be first? Why don't we just do it in the order in which people are sitting, I guess. Does that sound reasonable?

MR. : Fine with me.

RUBIN: Okay. (Chuckles.)

MICHAEL D. BORDO: Then I'm first.

RUBIN: You're first.

BORDO: Well, thank you, Secretary Rubin.

In my five minutes, I think I want to make one simple point, taking off from what Bob Rubin said: that the crash of '29 and the Depression of 1930, '33 were separate events.

I think it's important to remind ourselves of that, because we were all brought up -- I mean, I've tried this out on generations of students, like -- and it's -- one of things that everybody knows is that the crash of '29 somehow caused the Great Depression of the 1930s. So why was there a hint in Mr. Rubin's remarks that these were really separate events? And I think the reason is that people, knowing that, say, the Dow Jones average was 380-something on early September 1929 and down to 42 on early July of 1932, you know, from the later perspective, it looks like, well, we just -- as Warren Buffett might say, we just fell off a cliff.

What is conveniently forgotten in that is that there was a downdraft in the stock market from early September -- you know, the Fed had raised the interest rates in September 1929 -- the market went down from about -- the Down went down from about 380 to roughly 300 by October 24th, which is sometimes called Black Thursday.

And then, of course, between October 24th and November 10th or 11th, it fell to 200 -- from 300 to 200 -- so the crash itself was like from 300 to 200 on the Dow.

But what's conveniently forgotten is that over the next several months, from early November 1929 until some time in the middle of April 1930, the Dow Jones average went up almost to 300 again. It gained, like, 96 percent, approximately, of the -- what it had lost during the crash proper.

And so -- and if you read the newspapers of 1930, which is something we -- you know, it's hard enough to read the newspapers today and keep up with all the stuff on the Web and all that. But if you read the newspapers in March and April of 1930, the crash is kind of receding from people's memories. "Oh yeah, there was a little trouble in the stock market last fall. You know, we're out of it now."

And so, you know, there was this recovery, which is conveniently forgotten in most of the -- I think there's one brief sentence in Galbraith's "Great Crash," you know, which is the "How it Was Terrible," that says, "Oh, you know, and the market made a little bit of a recovery after the crash." But that's it. You know, the rest of it is awful.

So that -- I think that, you know, the recovery from the crash of '29 indicates that the market may have been -- we'll probably have some arguments about that today -- whether the market was overvalued very much or it was properly valued. I know people in the room have taken both of those positions.

But there was a recovery. It seems to me, as an economic and financial historian, that whatever was -- caused the Great Depression somehow happened after the first half of 1930. And, in fact, if you look at 1930 overall, it doesn't seem so bad. What really got bad was toward the end of the year when there was a banking crisis. And right here in New York, something called the Bank of the United States failed -- and that was an unfortunate name to broadcast to the world. Even though it was not really a major New York City bank, it sounded bad when Bank of the United States fails in December 1930.

So it's kind of 19 -- late 1930 through 1932, that's when the Depression unfolded. And it had much less to do with the stock market, I think, than with the thousands and thousands of bank failures. The -- that dragged the stock market down, but I don't think we can actually say that the great crash of 1929 was a major cause. I would agree with Secretary Rubin that the events were, perhaps, related -- you know, it was a blow to confidence -- but, in fact, the crash was pretty much undone by April 1930, and it was after that that things got bad.

Well, I think I'll close with that. We have a schedule to keep on. Thank you.

RUBIN: Michael, thank you. That was a very provocative set of comments. I've already got my first request -- I'm sorry -- Dick.

I apologize -- Benn.

BENN STEIL: Thanks, Bob. I thought I'd start out with a brief quote from a recently published book on the financial crisis. It starts out by talking about the lower-interest-rate environment that we've had and the boom in securitization, and then writes, "This favorable situation in the capital markets was translated into a construction boom of previously unheard-of dimensions.

A real-estate boom developed, first in Florida, but soon was transferred to the urban real estate market on a nationwide scale."

Why am I reading this? This book was actually republished recently. It was first published in 1937. And it was written about the 1920s. In fact, the parallels between the 1920s and this decade, I think, are absolutely remarkable.

And I'm only going to concentrate on one area, which is monetary policy. And that may surprise you, because we're told that the United States was no a gold standard at that time.

So somehow the Federal Reserve was shackled by the rules of this system. They didn't actually have such discretion. So how could there be parallels to be drawn?

Well, in fact, the Federal Reserve, which was only created in 1913, was actually pursuing a very activist policy during the 1920s. And it was extremely successful, based on what they were trying to do.

If you listen to testimony of Federal Reserve officials, before Congress, in the mid-to-late-1920s, they're absolutely clear about this, that they were pursuing a price stabilization policy. Very familiar, isn't it?

Of course, our own central banks and indeed at least developed- market central banks around the world pursue price-stabilized -- stabilization policies. They usually refer to this as inflation targeting. And they were doing much the same in the 1920s.

This particular book -- I won't even mention the authors, because they won't be familiar to any of you -- was very critical of this policy. Because they said the period of the 1920s, particularly from '22 to '29, when we had enormously stable prices, was a period of great technological progress.

There was significant downward pressure on prices. And what the authors argued was that by pursuing price stabilization, without regard to anything else that was going on, in the credit markets, they were making a big mistake. And they were fueling a credit boom.

And I just thought I'd read you their conclusion. No, I won't because I just lost the page. (Laughter.) But basically they concluded that this policy of price stabilization, ignoring what was going on in the credit markets, was actually the very cause of the Great Depression.

Now, how is that possible, if the United States was on a gold standard? Why was the Federal Reserve able to do this? And the answer lies in a little-known conference that took place in Genoa in 1922.

After the First World War, countries had experienced a great bout of inflation. They wanted to go back on the gold standard. But they were all extremely nervous about losing their gold stocks.

So at this 1922 conference, they reached an agreement that instead of redeeming each other's currencies for gold, they would hold foreign currencies in reserve in lieu of gold.

So how did the old gold standard work? The U.S. would send a dollar to France. France would redeem the dollar for gold. Gold stock in the U.S. would decline. That would force the U.S. to tighten monetary policy, and any sort of credit boom would be mitigated.

But now, the rules of the game were completely different. It was called the gold exchange standard. The same sort of system worked in the 1960s. The U.S. would send a dollar to France. France would not redeem the dollar for gold. France would count the gold as its own, and expand its money supply. They would redeposit the dollar in a New York bank, which would use that deposited dollar to expand credit throughout the economy. And what you got was a huge credit boom that went on throughout the world.

And interestingly enough, the head of the New York Federal Reserve Bank at the time, in the late 1920s, Benjamin Strong, realized that something was going wrong here and that this was going to lead to problems. In fact, he wrote a personal letter to the governor of the Bank of England in 1927 in which he wrote, "I am inclined to the belief that this development has reached a point where, instead of serving to fortify the maintenance of the gold standard, it may in fact be undermining the gold standard because of the duplication of the credit structures in different parts of the world." So he realized that something was going wrong here, and that the self- equilibriating mechanism of the gold standard was no longer operative, and that this was perhaps fueling a credit boom.

Again, there are significant parallels to today. In the early part of the decade, we were sending dollars to China. China would immediately send those dollars back to us, in the form of a very low interest rate loan. This would be used to expand credit in the United States. And, lo and behold, prices still remained very stable in the United States, so the Federal Reserve didn't feel that this was anything worth counteracting.

I should emphasize, though, that if the Federal Reserve had even been paying the slightest attention to gold, for example, shadowing some sort of gold standard -- and Alan Greenspan claimed to have been a great devotee of gold -- monetary policy would have been tightened significantly, because the United States would have been losing gold stocks. As you remember, the gold price was rising dramatically in the early part of the decade. Yet, the Federal Reserve did, of course, not tighten monetary policy. From 2001 to 2005, it was extremely loose.

Now, after the crash, there's complete consensus among economists that the Federal Reserve made big mistakes and that monetary policy was way too tight. The question is whether the gold standard can be blamed for this. From 1929 to the middle of 1931, gold was actually pouring into the United States. So if the Federal Reserve had really been obsessed with maintaining the gold standard, they would have loosened monetary policy very significantly.

I've gone back and forth with various scholars who like to blame the gold standard for this problem, and they say, rightly, well, that all changed in 1931 -- the middle of 1931 to '33, when the U.S. went off -- finally went off the gold standard, money started to flow out of the United States; yet the Federal Reserve still pursued a tight monetary policy. And this part is completely true.

But what I should point out is that this was not being driven with central banks' obsessions with gold. Central banks wanted to get away from gold. It was the publics, themselves, that were obsessed with gold, because they viewed gold as money. The national currencies, like the dollar, they viewed as being just vouchers for gold.

In the middle of 1931, France, just as they did in 1971, said, "The game is up. We want our gold back." And they started redeeming dollars for gold, so there was a scramble for gold around the world.

And a French central banker named Charles Rist wrote in a publication called "Foreign Affairs" in 1934 the following. He said, "A wider and wider gap is opening every day between the deep-rooted conviction on the part of the public -- that is, in gold as the only state sore -- state store of wealth -- and the disquisitions of those theoretical economists who are representing gold as an outworn standard, while the theorizers are trying to persuade the public and the various governments that a minimum quantity of gold -- just enough to take care of settlements of international balances -- would suffice to maintain monetary confidence and that, anyhow, paper currency, even fiat currency, would amply meet all needs. The public in all countries is busily hoarding all the national currencies which are supposed to be convertible into gold."

So you see, it wasn't obsession of central banks with the gold standard; quite the opposite. They were pursuing very much the sort of activist policies we see today, although they certainly got it wrong in the early 1930s. But gold wasn't the source of the mistakes that they were making.

RUBIN: Thank you.

That's okay.

RICHARD SYLLA (?): (Laughs.)

RUBIN: Professor Prescott?

MR. : Liquidity crisis. (Laughter.)

RUBIN: (Laughs.) Liquidity crisis.

EDWARD C. PRESCOTT: The period of the '20s was one of healthy growth, until Hoover's anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted, brought this expansion to an end, and created a great depression. Roosevelt's policies prolonged the Depression for over six additional years.

Well, what I was going to say about the '29 crisis has been said. Thank you. (Chuckles.) It had nothing to do with the Great Depression. This drop in the value of the stock market then was small, relative to a lot of drops subsequent to 1960. There was a drop in '62 as big, in the middle of the biggest expansion -- the largest expansion. There was a drop in '69. There was a drop -- a bigger one in -- a much bigger one in '73, '74. There was a very short-lived one in '87. There was one in 2000 -- that started in March of 2000 and lasted into 2001. There, a GNP of value of the stock market was lost. And the recent one, where about a half of GNP has been lost so far.

By the way, McGrattan -- Ellen McGrattan and I looked at the -- using some theory and saying, what should the value of the stock market be? You look at the value of the productive assets, and this includes intangible capital, brand names, patents, know-how of corporations, as well as the explicit machines and factories and equipment. You got to correct for taxes. If the government takes a third of everything distributed to the owners, the government owns one-third of the corporation, and the market value is only two-thirds the value of those assets. We found that it's correctly evaluated. By the way, the stock market is volatile as can be. But there's a strong regression to fundamentals.

What about the great U.S. depression? Well, you can depress an economy two ways. You can depress productivity -- output per hour -- or you can depress the number of hours worked per working-age person. The big thing in the Depression was not the productivity. Productivity was quite healthy. Growth was healthy during that decade.

Throughout that decade, the amount people worked relative to 1929 was depressed by almost 25 percent. By the way, the Europeans now work about a third less than Americans or Japanese or Australians or New Zealanders or Canadians -- all the other industrial countries? Why? Well, we know that reason: high tax rates -- high marginal effective tax rates, I should say.

But high tax rates were not the problem in the '30s. We looked at that, and that's only a small part. Has to be something else. What's that something else? There's really only one candidate that I know of that is consistent and -- theoretically and empirically, and that is the Cole and Ohanian cartelization policies.

I emphasize lack of government spending was not the reason for the big fall in employment. But the economy only recovered and it started recovering in 1939, when there's a major shift in policies. That was the year when Roosevelt said the New Deal is dead. That was the year he called up the businessmen who had fled to England because -- and said please come back; we got to get ready for war.

It was not expenditures. Government defense expenditures and net exports did not jump until 1941. And the economy did jump in '39 and '40 and recover. They reinstituted antitrust policy.

What about my predictions for the United States now? Last -- the growth from 2007 to 2008, fourth quarter over fourth quarter, was 1 percent. I the Great Depression we had about four years where the growth rates were minus 5 or 6 or 7 percent. This is plus 1. It would have been normal year if it was not for that fourth quarter.

Trend year -- you know this trend year -- living standards double every generation. They go up about almost 2 percent a year.

I do predict the U.S. will lose a decade of growth. We'll be more like the -- why? Marginal tax rates will be increased. The productivity-depressing policies will be adopted in this country.

A lot of people don't know the current administration has abandoned the use of cost-benefit analysis by rescinding the 1981 executive order requiring all regulations to be evaluated before being implemented.

By the way, a decade of growth is a 19-percent increase in a decade. Japan had a financial crisis in '91 and '92 and lost a decade of growth. North American and Western Europe did well. Finland had a financial crisis, at about the same time as Japan, and during the next decade had two decades of growth.

Conclusion: I hope I'm wrong about my negative predictions, for the U.S. economy, in that our economy performs like the Finnish economy and not like the Japanese economy, after their respective financial crises. Thank you.

RUBIN: Ed, thank you very much.

When a Nobel Prize winner tells you we're going to lose a decade of growth, you sort of do have to think that that should be thought about with some seriousness.

BORDO: Okay, my comments are going to in some respect echo what Dick Sylla said and what the others said. There are sort of -- there are two principal stories on what cause the Great Depression. One is the failure of the Federal Reserve. And the second is the gold standard. And I'll just mention each of those two views briefly.

But first of all, getting back to the 1920s, the '20s was a period of remarkable economic reform, this rapid economic growth, 4.5 percent per year, rapid productivity advance. Okay, and the Federal Reserve in the United States had actually, after a disastrous start in the '20-'21 recession, followed fairly stable policies in this period.

But there was a problem with said policy. And that is that they believed in what's called the real bills doctrine, which argued that if central banks were to discount the paper of member banks, and if the paper was based on what's called self-liquidating real bills -- that is short-term commercial bills, which would always in a sense turn over each year -- that there would never be too much money or too little money.

A corollary of the real bills doctrine was that you should never finance bills that would finance stock-market speculation. So the Fed did a reasonably good job in the '20s. But then when the stock-market boom started, about 1926, the Fed became increasingly concerned about this on real bills doctrine lines.

In a sense, they thought that the asset price inflation was really going to be inflationary and that policy should be used to tighten it, to stop that. And so they tightened progressively starting in '28.

This led to a recession, which started in the summer of '29. And then the Crash followed the recession. Okay, and the Crash itself, as everyone and the others have all said, was not the cause of the Great Depression.

In fact, the Fed initially -- the New York Fed initially followed very good policies in October and November of '29. And they flooded the money markets, the New York money markets, to prevent a liquidity crisis.

But then they stopped, in late '29. And they stopped because there was pressure coming from the board on real bills line, which had said, look, if we keep expanding, we're going to refuel the stock market boom. And so they checked the tight policy, from that point onwards. And we know that '30 was a disaster. It was a disaster because there was a series of banking panics which started in October '31 -- October of '30, and the last one was in '33.

And these four panics, okay, were disasters because they did two things: A, they drastically reduced the money supply, and this reduced spending in prices and output. And secondly, they destroyed the credit -- they destroyed what Bernanke called "credit intermediation." And this again had a very negative effect. Okay?

And the Fed did not -- the reason the Fed did this -- and there's two stories, there's Friedman and Schwartz, and Bernanke and Meltzer. But you know, one is the real bills story that I told you. Another is the Fed itself, okay, had some serious structural problems. There was a sort of continuing conflict between the reserve banks -- and specifically, New York -- and the board in Washington. So there was a paralysis and the Fed couldn't act to deal with the deflation and depression that was taking place. Okay.

And it didn't end until Roosevelt came in and the banking panic -- and imposed the banking holiday in March 1933, which ended up closing one-sixth of the nation's banks, and so in a sense clearing away the serious problem of bank insolvency. And also, the last thing that happened, thank God, is that -- and it started getting us out of the Depression -- was the Treasury followed expansionary gold purchasing policies, not the Federal Reserve. That in a sense led to a recovery that started in '33.

Okay. I have a minute, and I want to just mention -- I'll mention the gold. So the gold standard comes in in a number of ways. The one way in specific is that all the countries in the world are tied together with gold. When the U.S. goes down, the shock is transmitted to the rest of the world. Okay, and so we transmit -- the Depression starts in the United States; it's transmitted to the rest of the world.

Also, the rest of the world, the small countries and even fairly large countries, have a problem, in that because they had not -- they do not credibly adhere to the gold standard, okay, to the gold- exchange standard and the problems of the gold-exchange standard that Benn Steil talked about, okay, that they could not follow expansionary policies to get us out of the Depression; that when they did, there would be speculative attacks on their currencies.

And so they were anchored by what's called golden fetters.

And the only country that could have gotten us out was the United States, because the U.S. had extremely large gold reserves. And if they had followed expansionary policies starting in 1930, which they could have done, they had the technology to do so, that could have re- flated the world and prevented the Depression from turning great.

RUBIN: Well, we certainly have different points of view on a bunch of things. Let me start with this. No, I'm going to start a different place. I was going to start one place, now I'll start another.

If you all were to look at the 1920s -- we can just sort of go around real quick. If you all were to look at the 1920s and 1930s, and if the people who are making policy in the United States today were sitting here, what would you say to them is the one lesson that they should most take away from that period as to what they should do or shouldn't do?

MR. : I think don't let the financial system fall apart and cease to function. Financial systems are extremely important, and they're what made the rich countries rich, and yet every now and then they have a tendency to go off the rails, and that happened in the '30s and it is happening again now. And so we're going to be into a period of reforming the financial system, as we did in the 1930s. I'm sure by the end of the day that will be much discussed. And it takes some time to figure out, you know, really good reforms, not necessarily harsh reforms or lax reforms, but we really should put a lot of effort into thinking about what are the right kind of reforms to make now.

RUBIN: But is there anything -- the question of reform is a big one, and it's going to be enormously debated, but even before you get to reform, you got to prevent, I guess, the diminution in credit extension and so forth that's going on right now. Is there anything from the '30s that would be useful as they think about not the reform question -- although you're right, that's a big question -- not just to respond to the present shrinkage or greater level of credit availability, both to the bank system and the shadow banking system?

MR. : Well, I think we are responding. I mean, there are all kinds of Treasury measures, (every third ?) measure -- I'm fairly impressed by the response. And I'm not sure that every one is, you know, the best way of doing it. But I think the big difference between now and the '30s, which is why I sometimes joke and, you know, talk to my students about the Great Depression of 2008 to 2012 -- but the reason I think we won't really have a Great Depression of 2008 to 2012 is because of the measures that are being taken. And that's the big difference between now and the 1930s.

MR. : I would strongly agree with Dick. I could certainly quibble with measures that we're taking today, but the important thing that we're doing today that we didn't do then is that we've stood behind the banking system. There was no FDIC. The Federal Reserve didn't view it as part of its remit to stand behind the banking system.

In fact, right before Hoover left office, he asked that explicitly: Shouldn't you guys be doing something? And they didn't even respond to it. They did not believe that that was part of their remit. So the banking crisis just cascaded and became worse and worse, and there was no one to call an end to it.

I would just make one more point in terms of how we got into the crisis. You know, over the past decade -- I edit a journal called "International Finance" -- there's always been a debate between those who believe that good monetary policy is fundamentally inflation- targeting and those who say, "Well, not so fast." We have to target asset prices, because you can get asset-price booms.

And of course the inflation-targeters respond, "Well, we can't do that, because we don't know when we have an asset-price bubble." But that sort of misses the point about this decade, because it wasn't one specific asset market that was booming. Credit was expanding across the economy. You had asset-price booms in real estate, in housing, in stock -- the stock market, in the commodities market, in the art market. It was across the board.

And so I think the lesson that we have to learn, both about the 1920s and the present decade, is that the Federal Reserve does have to pay explicit attention to the broad growth of credit in these times.

RUBIN: Could -- let me ask you, could you -- can you explain one or two -- see, I read your book. It's a good book. I would recommend it. Not going to be a movie or anything. (Laughter.)

But why -- you seem obsessed, with all due respect -- (laughter) -- obsessed with the gold standard. But we don't have a gold standard. We're not going to have a gold standard. Can you take the gold standard out of your book and just think of it all in terms of monetary policy?

STEIL: Absolutely! I mean, that's the point that I thought I was making, that the Federal Reserve was not slavishly following a gold standard.

RUBIN: So you did say that in your book. Yes.

STEIL: I did say that in the book.

RUBIN: And you think we'd have been better off if they'd slavishly followed the gold standard?

STEIL: Well, we couldn't have done that, because the gold standard required an -- a historically unprecedented level of cooperation -- shall we say, comity -- among nations that really ceased to exist after 1914.

I should emphasize that there is no possible way politically that we could ever go back on any sort of gold standard. Having said that, I don't believe that the Federal Reserve can just completely ignore what's going on not only in the credit markets but in the gold market, just because of the fact that, among people around the world, gold still plays a monetary role, and the fact that the gold price was soaring in the early part of the decade, I think, was at least a warning to the Federal Reserve that something was going wrong.

RUBIN: So you'd use it as an input, is, I think --

STEIL: Exactly.

RUBIN: I think G-20 is about to show us once again that comity among nations is not total. (Laughter.)

STEIL: Maybe comedy among nations.

RUBIN: Yeah, comedy -- no, comedy among nations -- if you can laugh at all this, I guess --

STEIL: (Laughs.)

RUBIN: Professor Prescott?

PRESCOTT: Okay, what to do?

RUBIN: Well --

PRESCOTT: Don't subsidize inefficiency. That depresses productivity, one. Two, cut tax rates. That'll lead people to work more. This financial stuff is much to-do about nothing. If -- I know the Wall Street bankers are a little (sad ?), and some of your friends -- (laughter) --

RUBIN: Well, actually, all of my friends, but that's -- (laughs, laughter).

PRESCOTT: I'm not happy.

But I don't know, I don't -- I don't see any reason to -- for the taxpayers to bail out Goldman Sachs in a roundabout way, through AIG -- $16 billion. You know -- should have let these businesses go -- banks go bankrupt. They gambled, they lost.

That's part of -- part of life. It would have had minimal real effects upon the economy.

The economy has been doing great for about 26 years, until about the fourth quarter of 2008. And that can be reversed in almost no time, if there's some confidence about, good policies will be followed in the future.

RUBIN: Okay.

MR. : I think the lesson we learned from the Great Depression, which has resonance for any depression or recession, is to follow sound, stable monetary policy.

And I think that, and that includes both policies aimed at maintaining the value of money but also policies which -- where the central bank acts as a lender of last resort and deals with financial panics by acting in a very aggressive way, by providing liquidity. And I think if the Fed had done those things in the 1930s that we wouldn't have had the Great Depression.

Now, what about today? I think the Fed has been concerned with low inflation. So the macro issue has not been the kind of -- macro instability hasn't been the issue that it was in the '30s. But with respect to financial stability, I think, they got it wrong.

Initially they did respond by providing liquidity. But then when it appeared that there was more to it than just illiquidity, that there was also a problem with solvency, it took them a long time to get on the stick and to try to deal with solvency.

The solvency issue isn't even a Federal Reserve issue. That's a Treasury issue, which they haven't worked out. So once you get monetary policy straight, when you have a situation like now, you need to sort of -- you need to stabilize the banks.

I think what's needed, and this is really the problems of later conversations today, is that the government needs to in a sense take over the banks, recapitalize them, take off the bad assets, and do something like the Swedes did.

RUBIN: Are you worried at all about the enormous -- quantitative easing, credit easing, call it what you like -- but the immense amount of money coming into the system?

MR. : I'm worried about that for the future. And I think probably we will --

RUBIN: I meant for the future.

MR. : We will probably have an inflation problem, because the Fed probably will not react fast enough to take it out. But I think that when you're dealing with a situation like this, when you have the economy falling really, you know, fast, and it looks like the end may not be right around the corner, the story is rapid quantitative easing and the expansionary monetary policy.

And one more thing that I will say is, lastly, that when the dust settles five years from now, and we're re-looking at this episode, okay, and we're going to say what got us out of it, see, where I think my -- my prediction is that we'll that it was monetary policy, expansionary monetary policy, that got us out of it, attenuated the recession; that what will determine whether the recovery is slow, is tepid or, you know, fairly rapid is going to be whether they deal with the banking problem.

RUBIN: It's interesting; none of you mentioned trade or Hoot-Smalley (sic; Smoot-Hawley). People don't think was a significant factor?

Dick?

SYLLA: Well, I -- you know, that was a -- it was the wrong thing to do to raise tariffs to the highest level in American history in 1930. That was clearly the wrong thing to do. Other countries retaliated. I think that's a problem we face now.

I mean, the -- you know, there are -- protectionist sentiments are there all the time, but they can really come out and do some damage when you're in a crisis like this, because, you know, people are unemployed in our country, and they're going to put pressure on their elected representatives to do something about that, and you know, since we have the government of the people, the Congress is likely to respond. And the problem is that you may win a few votes that way at the next election, but when other countries start doing the same thing, then we slide down the slippery slope, and that's not good.

MR. : Yeah. I mean, the research by economic historians on the Smoot-Hawley tariff tells us that, I mean, it did have negative effects, but it was not like a key cause of the global downturn. I mean, it was of cause and it was important, but it wasn't that important.

And so I think it's important -- this is an important issue, but it's not the key issue. The key issue is getting the U.S. economy, which is the center of the world, looking at the world economy -- still getting the U.S. economy back on track.

RUBIN: Ed?

PRESCOTT: I guess I'm going to agree with the first speaker. I think this is big time, this openness. Why have the Central European countries done quite well, the European Union? They became open to the other members. All the countries in Asia that are doing so well -- openness.

The U.S. -- if we closed off, there wouldn't be the competition. Productivity would suffer. That would be -- I suspect that Hawley- Smoot Tariff probably had a bigger effect, negative effect, than you suggest.

RUBIN: Let me ask a final question and then I'll just -- and then it's the final words, and then I'll leave it open to you all.

Why was it that the Depression in the United States was so much more serious and lasted so much longer than the depression lasted in most other countries? Anybody could --

PRESCOTT: Well, first, it lasted a lot longer in the United Kingdom. It started earlier, in the early '20s. Germany, it was a lot shorter and more severe. It started in '28, earlier, and they -- the Weimar Republic set the real wage way, way high in the industrial sector and -- massive unemployment. As soon as they got rid of that real wage, let the markets operate in the labor market, the economy recovered, just as theory predicted it would.

So if you look at the depression in Chile, it was very similar to the U.S., and in Canada. But in terms of the duration, there's a long period of low -- where output is depressed.

BORDO: Yeah, I think that -- that part of the reason that the -- our recession was so serious in the U.S. and also -- the Depression -- and also Germany, was the collapse of the banking system and that -- but once they dealt with that problem, recovery came pretty quickly. And I think that in '33, there was really rapid growth between '33 and '35.

And I think, to agree with Ed -- I think that it was some of the New Deal policies that restricted the labor supply that sort of attenuated the growth. It didn't stop growth, but growth would have been a lot faster. And likely, if these policies had not been put in place, we might have recovered a lot more quickly than we did.

RUBIN: Let me wind up with a final question, if I may. And this is a little bit outside the ambit of what you all do, but you all are students of the Depression. Policy ultimately is made in the political context, and as you craft it, you're subject to its pressures. As you go to implement it, you're subject -- you either need congressional approval, or even if you can do it by executive action, you're subject to congressional criticism, and even the revocation of what you've done, in some cases.

What was the political atmosphere like in the 1930s as policy was made, as compared to today?

MR. : Well, I think there was a -- you know, Roosevelt did a lot of new things and there was a backlash against it. I would agree that there was a good recovery from '33 into '35-'36. And everyone felt good about that, and then somehow we had the pretty bad recession of '37-'38.

I think it was -- you know, because there were so many political cross-turns, policy wasn't so good. I mean, we found out now that Roosevelt's spending, which his opposition didn't like, was really not nearly enough to get us out of the Depression. I mean, you know, we used to talk 30, 40 years ago about the full employment surplus. It turns out that all of Roosevelt's policies, had the economy been at full employment, there was no net stimulus to the economy. So you coupled no net stimulus from this outrageous New Deal spending that so offended Roosevelt's opposition, along with monetary policy that kind of reversed itself in '36 and '37. I mean, we sort of aborted the recovery that was taking place.

It was a good recovery. You know, if you want a little note of optimism, had you bought stocks at the bottom in 1932, you would have quadrupled your money over the next four to five years. Think about that. From '32 to '37, you would have quadrupled your money by buying stocks.

MR. : The problem -- I mean, you're right. The problem with the theory of buying at the bottom because then you'll make a lot of money is this was -- (inaudible) -- I mean, the practical application of it -- (cross-talk) -- identifying the bottom is not a simple matter sometimes. (Laughs.)

MR. : I bought some stocks in 1973 when I thought the bottom -- the market couldn't go any lower, and I lost half my net worth from that point on. So it's kind of complicated. But your point is (still relevant ?). (Laughter.)

MR. : Roosevelt had to invent the machinery of government to intervene and stimulate the economy. Today we've got it. We've got it in boatloads. That's what kind of concerns me. If you looked at a lot of actions that are being taken -- how shall I put it -- off balance sheet by both the FDIC and the Federal Reserve, these are actions that are being taken without congressional approval and relatively little congressional oversight. Now, you can argue that the FDIC and the Federal Reserve had to move very fast; there was no alternative to this. But it is building up big problems for the future.

Michael pointed out the challenge that the Federal Reserve is going to face in unwinding its balance sheet. Well, think about the political challenge involved. They hold a lot of private assets. And there are powerful political constituencies behind the originators of those assets. So it's not going to be a simple political task for the Federal Reserve just to flood the market with this stuff.

I think there's going to have to be cooperation between the Federal Reserve and the Treasury. There's already been talk of transferring a lot of those private assets from the Federal Reserve to the Treasury in return for, most likely, Treasury bonds in order to neutralize some of that politics. But that's going to be a real challenge.

RUBIN: Anybody else?

MR. : We could talk a little bit of expectations. I think that Roosevelt probably did, you know, raise people's expectations. And even though what he did actually may not have done as much, just the fact of his whole activist approach, given what had happened, might have actually had some effect on what people's expectations were, which might have, you know, made things better than otherwise would have been the case.

RUBIN: Good. This is terrific. I think we could go on for a long time, if we wanted to, exchanging views and questions, one thing and another, but why don't we open it to you all. And we would be delighted to entertain questions, comments, disagreements.

Way, way in the back. The gentleman standing against the wall. Identify who you are, ask a brief question, and then we'll get an answer.

QUESTIONER: John Tamny, RealClearMarkets. I want to address Professor Bordo's comment about the assets that went up this decade. It seems like it was commodities, it was housing, it's assets that always do well when the dollar is weak. And so the thing that I'd like to point out is, don't we -- isn't it pretty obvious why we're here? And in the '90s, in the late '90s when Professor -- or Secretary Rubin took over at Treasury, not once did this responsible Treasury official ever jawbone the Japanese about the yen.

Conversely, we've had three Treasury secretaries under Bush that all made China a policy, specific -- specifically a policy of talking up the yuan, which was a really a policy to talk down the dollar.

(No audible response.) (Laughter.) (Cross talk.)

MR. : He made it to you -- to you! (Laughs.)

MR. : He said Professor Bordo. (Laughter.)

BORDO: I'm not sure I quite understand the question, to tell you the truth.

SYLLA (?): I think the question has to do with the strong or weak dollar, right?

BORDO: I don't think that -- I think -- I think that the value of the dollar is the value of the dollar, and it's determined in the free market. And I actually don't think that the government should get involved in talking about whether the dollar should be strong or weak.

And I think there's this myth out there -- I mean, it's not a myth, it's just political reality -- that secretaries of the Treasury always have to say a strong dollar, but yet I think that as far as today is concerned we don't want a strong dollar. We want a weak dollar to stimulate the economy.

But I don't -- I know that's something that they couldn't say.

STEIL (?): In 2005 I was in China and talked to Wen Jiabao, and it was back then when the Congress was going nutty and saying we've got to get those Chinese, anti-globalization, anti-trade, big tariffs on their -- and what'd they do, they just picked something that was unimportant. It's like telling your kid to keep the room clean -- it's -- you got to have some arguments or something to deflect things away from important issues. And this exchange rate of the RMB and the dollar was one of those unimportant things that -- you could keep Congress under control.

SYLLA (?): I was just thinking to myself I'd like to -- I mean, it's an interesting day, the day the secretary of the Treasury got up and said, "We are in favor of a weak dollar." I'll tell you, that would not be an -- that would not be an -- you may be right (about ?) America; I'm not worrying about that one way or the other -- that would not be an unvolatile day in the markets.

RUBIN: Anybody. Yes, sir, over there.

QUESTIONER: (Jeremy/Daniel ?) Powell. The St. Louis Fed last year published a chart of GDP from about 1932 to 1937, which Paul Krugman ran in a column in The New York Times in November.

And this showed -- it appeared from the chart, the GDP chart, that bottom was hit in the very beginning of 1933, and that the turnaround in GDP, the upturn, had begun before FDR was sworn in on March 4th of 1933.

You had about a 17-percent increase in GDP, in 1933, which would seem to be before it was possible for any of FDR's policies to have played out, through a large, complex economy, and accounted for an expansion. And of course, you had a GDP expansion of about 60 percent from 1933 to 1937.

And many, many of you as well as others have noted that among the most important policies, in terms of their effect, with the Agricultural Adjustment Act and the National Industrial Recovery Act, both of which had contractionary effects.

And the effect of the gold policy entitled the Treasury to print another $3 billion, which would have promoted expansion. But gold held by the public did not, or I should say currency held by the public, did not increase until 1934.

What do you -- assuming that these Fed St. Louis figures are correct, what -- you know, this suggested that if FDR had done nothing but restore confidence and be an upbeat spirit and a political genius and an extraordinarily skilled communicator and a much more positive personality, that the recovery was under way.

What do you make of that apparent recovery being under way, before FDR took office, and continuing before it was possible for any of these policies to really have an effect?

MR. : Okay, first thing, you did not have quarterly data until -- you only had annual GDP data from 1929 to 1947, before they -- statistics got better. The U.S. economy did go down -- I'd correct for trend and I'd correct for population slide, working-age population. The trend's about 2 percent a year.

The economy went down about 35 percent, and it bottomed out somewhere close. And the recovery was only about 10 percent. It stayed 25 percent down until 1939.

Some of those big growths that you were talking about there is inconsistent with the Bureau of Economic Analyses statistics. That's the official government statistical agency.

MR. : It -- there were two events that you didn't mention or one you did but one you didn't. I think that the recovery starts around -- the bottom, I mean, is around March -- February, March '33. But what the -- but the big event is the bank holiday, which sort of stopped the collapse of the banking system -- the banking holiday the first week in March. And I think that that was something which -- you know, it wouldn't have -- I mean, Hoover could have done it, okay. It's not there this suddenly was this -- you know, it was tied in with ideology. It was just a very good policy, and that stopped -- that really stopped the contraction.

And secondly, the devaluation of the dollar -- I mean, in April the U.S. left the gold standard and allowed the dollar to float, and the Treasury began buying gold after that, and it was the -- it was a devaluation of the dollar, the buying of gold that spurred that initial recovery in the first year.

RUBIN: There is a dumb question, and I've wondered about it. Why did the bank holiday --

MR. : January -- (off mike) -- March.

RUBIN: Why did the bank holiday help the banking system?

BORDO (?): Because it cleared away this credit --

RUBIN: It was just a holiday, right?

BORDO (?): No, it was a one-week closing of the banks.

RUBIN: Yeah.

BORDO (?): And what happened in that period was that -- and since all transactions stopped, so the economy sort of went into -- just froze, right. But during that week, you know, they sent in an army of bank examiners to determine whether banks were, A, insolvent; B, completely -- very solvent, insolvent or in the middle. And then they only allowed banks to open initially that were completely solvent.

So this dealt with this whole asymmetric information problem that we have right now about, you know, people being really worried about the banking system, because now we knew that the banks that were there were sound and that this -- then so the -- in a sense the extent that that was precipitating the Depression, which I think it was, okay, that one big issue was cleared away.

QUESTIONER: So that was -- there was no stress test in effect?

BORDO: It was a major stress test, okay? And in fact, they did -- what the government's doing now is basically what they did then.

PRESCOTT: Well, they also instituted deposit insurance, and that came in '34.

BORDO: That was '34.

PRESCOTT: They put a barrier between commercial and investment banking that --

QUESTIONER: But that was later, wasn't it?

PRESCOTT: Uh-huh.

MR. : But President Roosevelt said, right in one of those first fireside speeches that he told the American people that, you know, the banks were shut -- "If a bank reopens, you can be confident in it." And this seemed to be -- you know, Jonathan Alter, who I think is going to speak later today, writes about this in his book. And the public actually started putting their money -- they believed Roosevelt. They put their money back in banks. The bankers themselves, for most of the decade, seemed to be scared, I mean, but the public -- the public -- and that's something to think about for now. You know, maybe all the rest of us will come back, but the bankers will be scared for the next five or 10 years -- (chuckles).

So I think, you know, the bottom -- to get to Mr. Paul's question, you know, there is some sign about -- the stock market bottomed in July '32, and it did not, despite all those bank failures in early '33, it did not go back to low levels. The economy may have turned the corner, but I don't think -- as Ed says, we don't have the data really to be sure about that. But there is some market evidence that it might have been true. But then the bank holiday actually, I think, restored a lot of confidence and helped the economy recover for the rest of the year.

RUBIN: Yes, ma'am.

QUESTIONER: Hi. My name is Claire Chesney (sp). I wondered if you could all address --

RUBIN: Why don't you state where you're from?

QUESTIONER: I'm actually recently unemployed. (Laughter.)

RUBIN: So am I, actually. (Laughter.)

QUESTIONER: (Laughs.) It's probably the only time in my life that I can say we have something in common. (Laughter, applause.)

I was hoping that you could all address job creation and unemployment, from a lessons-learned perspective from the Great Depression, but also from -- from the very new globalized market of outsourcing of -- the new global job market environment.

RUBIN: So this is the question -- let me just say this. So this is the question of job creation, particularly taking into account globalization and what you refer to as outsourcing.

Benn, do you want to take it on?

STEIL: Well, I would just say, it's related to the issue we talked about a bit earlier, about protection. People who favor protection are going to look at the current situation. And they're going to say, you know, it's going to reinforce the arguments against outsourcing. And it's understandable, I think. But it's not really -- good policy would not be made on the notion that we should stop all outsourcing and stop imports of goods from other countries.

So I would just say, it's going to be a dicey issue. And let's hope that our leaders think about the 1930s, as an example of what can go wrong, if you let these things get out of hand.

RUBIN: Others?

I guess Ed referred to the rigidities, I think he did, of the '30s, and the effect that had on -- adverse effect on job creation.

MR. : By the way, the thing that I was -- about 1960, they were worried about the recovery of -- we were worried about the recovery of Western Europe. It was going to create massive unemployment or non-employment in the United States. It didn't.

Then Western Europe and the U.S. in the late-'70s was worried about, Japan and their rise would create massive unemployment. What happened? Employment keeps going up, at least in the U.S. And Europe just increased their tax rates. (Laughter.)

Then now we're worried about China. Well, it's just going to help us. The amount we work now, per adult, is bigger than it was in 1960. We've got some of those women working. Married women particularly, that has been the large increase in the U.S.

RUBIN: I think through very careful listening, I've sort of ascertained your view on marginal tax breaks. (Laughter.)

Yes, sir.

QUESTIONER: Good morning. Patrick O'Neill from Connecticut Innovations.

This question is for Secretary Rubin. What is your views on the recent -- Secretary Geithner's recently requested powers for non- financial firms?

And for everyone else, how do they compare to powers the government had back in the Depression?

RUBIN: I'll be very brief. I think that, you know, one needs to see more of the details of what he's talking about. Fundamentally they needed a way to deal with something other than banks.

So I at least for one think that conceptually he's right. Hank Paulson felt the same way.

I mean, they had the same view that you need some mechanism for dealing with non-banks that are systemically so interconnected that they create systemic risk. But, you know, specifics do matter, and we'll see what those are.

Others? And I guess the question was, do we have anything to compare that too in the Depression, right?

QUESTIONER: Please.

RUBIN: Yeah. Anybody --

MR. : These powers may be useful, but I'm not convinced that they would have done anything in this particular crisis. In September, you remember, when AIG initially approached the Fed and the Treasury, they were told to go jump in the lake. Then they opened the books, and of course everything changed, meaning that the big problem was not the lack of powers at the Treasury; the big problem was that the Fed and the Treasury didn't know a lot of things that they really needed to know. And so I'm first and foremost concerned about the information flow.

MR. : Which I guess they would get under -- I presume one of the things -- (inaudible) -- would be much more information.

MR. : Yes. Well, as you know, the proximate cause of the AIG crisis was their position in the credit default swaps market. And of course, there was no information out there, given that there was no central clearinghouse for this stuff, as to whose positions were what.

RUBIN: Somebody else. We'll go way in the back, gentleman standing up.

QUESTIONER: The question was asked why the -- Bill vanden Heuvel, Allen & Company. The question was asked why the European depression was significant, only less, perhaps, than the American. I think it should be noted the political circumstances with Roosevelt coming to power. Hitler came to power at approximately the same time and began a military effort that resulted in Germany essentially having no unemployment within a matter of a year or two. Italy, a fascist country, was having its trains run on time, and it, too, confronted its unemployment policy by military means.

I think we have to recall that in 1933, a country like America, 130 million people, an isolationist nation, not a significant part of the world power structure politically at that time, was in the midst of social unrest of profound consequences, and that what Roosevelt had to face after a depression that was already there years in depth was to deal with the social unrest through democratic means.

In his inaugural address, he talked about taking emergency powers. There were many forces in the nation that were urging a much more significant takeover of powers as a commander in chief would do it in that circumstance.

But I don't think all of the reactions that we can talk about can be dealt with unless we really understand the profound degree of social unrest that was confronting America.

RUBIN: Bill, let me wind up our session by asking a question, if I may. Would you say that there's an -- there's enormous anger across America today; enormous anger and, I think, fear. Would you analogize that in any way to the environment that Roosevelt faced?

MR. : I don't think the anger is consequential today compared to then. I mean, you were having mobs that were raiding courts where they were trying foreclosures in the farm areas of the country. You had workers in the streets. You had a significant organization of forces that were much more in action than they are, it seems to me, today.

But, as was referred to, Roosevelt's speech on March 14th, this first fireside chat, addressed very directly the bank question, and it was interesting how quickly things reversed in that context. Because before that speech there was a tremendous outflow of money, and after that speech there was an inflow of money.

So he was successful in doing it, but he took a great risk: He took the risk of democracy. He had strong majorities in the Congress that supported him -- in both of that, but the Republican opposition to him began eight to 10 months after he became president, and it's very mindful of what we face today.

RUBIN: Well, with that, I thank you all. And you can see, the Depression occurred 80 years ago and we can still have an exceedingly lively debate about caused it, what its -- the effects of its -- the response in policies, what effect the response in policies had and how all of it relates today.

Gentlemen, thank you very much. This was terrific. (Applause.)

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