The current recession might seem unprecedented—unless you've studied the myriad booms and busts that have characterized the American economy since colonial days. To ascertain how today's financial seizures compare with others in American history, I spoke recently with John Steele Gordon, author of Empire of Wealth: The Epic History of American Economic Power and six other financial histories. Excerpts:
We're surrounded, at the moment, by lots of failure in our economy. And a lot of bailouts. But failure is a key part of a free-market economy, right?
Failure is important in capitalism. It's what keeps our noses to the grindstone. If you can't fail, why work hard?
It also leads to innovation. Show me a socialist world that's produced any innovation. Fear of failure puts the fear of God into you. This country, for the most part, is very understanding of failure.
[See why more failure in 2009 might be healthy.]
Is the government going too far in preventing failure and allowing marginal companies to survive? Or are we in the normal zone, compared with other periods like this?
I think we're still in the normal zone. Banks are a special case. They've always been and always will be the circulatory system of the economy. If they had gone poof, it would simply have been horrific for everybody.
I was against bailing out the auto companies, though. Labor and management are not going to have to change anything until they have no choice.
Of course politicians love to spend money, and they've still got $350 billion to spend, and spend it they will. They're in the re-election business, and they're good at knowing how to get re-elected.
I realize this isn't the Great Depression. But what do you think are the most relevant lessons from that time?
History is always written by the winners, and Hoover gets blamed for the depression while the Democrats get credit for ending it. But Hoover did more to try to help the economy than any other president up till that time. Before then, the attitude was generally, let the market take care of it. Hoover signed the Federal Home Loan Bank Act of 1931 and tried a lot of other things.
Of course he also signed the Smoot-Hawley Act. Hoover promised struggling Midwestern farmers protection from foreign competition, and then everybody got that kind of protection. And that was a disaster.
The auto industry bailout was a very bad precedent. It could end up being like the Smoot-Hawley tariff. But reform comes around only when there's been a disaster. It took the Titanic for people to say that maybe ships should have lifeboats for everybody on board.
What's different today?
The world and the economy are changing so fast because of the microprocessor. It makes the steam engine look like a kazoo. But we're nowhere near the Great Depression. Think about it. My own family was pretty well off, and my grandmother told me that during the Depression she told the maid that if anybody knocked on the back door, to give them some food but tell them there was no work. Think about that—people knocking on doors looking for work and food. That's unimaginable today.
Can you think of any instances in American history when some kind of major failure actually set the stage for a significant success later on?
There are plenty of examples to the contrary. Take the savings and loan institutions in the 1970s. Every town in American had an S&L, and they were mostly rinky-dink banks. Big-time bankers dismissed them as 3-6-3 bankers: They took deposits at 3 percent interest, made loans at 6 percent, and management hit the golf course at 3 o'clock. If Congress had let these banks go broke in the 1970s, we wouldn't have had the catastrophes that happened in the 1980s.
Instead, they lowered capital requirements and made other quick fixes, and look what happened.
But there are plenty of people who failed before they succeeded. Henry Flagler was one of the founders of Standard Oil, along with John Rockefeller. Before he made a fortune on Standard Oil, he went broke in the salt business during the Civil War and was $50,000 in debt. That was a ton of money back then. A lot of inventors failed many times. Charles Goodyear spent years trying to make rubber stable at high temperatures. They named the Goodyear Company after him years later as an honor, but he never made a dime from this work.
American society today has a standard of living that's unrivaled in the history of the world. Are we becoming a soft society, afraid to fail and try again?
In the 1930s, the guys running Japan and Germany thought we were pretty soft. Obviously they were wrong. We've been the richest country in the world since colonial days. One third of the Hessians who fought for the British in the Revolutionary War looked around after the war and decided to stay here. They must have liked what they saw. We've always been accused of being soft. I don't think it's any different today.
What about consumers who are totally dependent on credit? And people who have borrowed so much more than they could afford?
It's only fairly recently that banks had anything to do with people of limited means. Credit used to be a privilege. Only after World War II and the GI Bill did the majority of people start buying homes on credit, with mortgages.
The suburbs revived after World War II, and homeownership went all the way up to 70 percent. But that was too high. The heart of the beast was Fannie and Freddie. These are two of the largest financial firms in the world, and where are they based? Washington. Most big firms are based in New York or London. What does that tell you?
Now, it's going to be an unpleasant couple of years, but it's not always as bad as it looks at first. I think the recession we're in will be more like 1981-1982; it will be fairly short compared with the Depression. We're a much better educated country than we used to be. We have more capability to innovate our way out. The desperation is not nearly what it was in the early 1930s.
You mentioned the microprocessor. Do you think we are just barely beginning to see the changes from that? Or is that evolution pretty well on its way?
We're barely at the beginning. The first analogy is to the steam engine. If you were born in 1780, the world you grew up in would have been perfectly understandable to your great-grandparents. But by 1860, that world would have changed beyond recognition. The phrase "the good old days" was coined only in the 1840s. Before then the old days were the same as the new ones. But by the 1840s, many homes had running water. There were railroads and the telegraph. Newspapers were cheap.
Think about the PC. The kids who are growing up with this technology today are, almost literally, having their brains wired by it. And your 20s are the most productive period for genius. We've barely even begun to see the kinds of changes that are coming.