Thursday, November 20, 2008

The Myth of 'Hands-Off' Hoover

Nothing new under the sun, really. Case in point...

Not long ago I received an email from the author of a Financial Times editorial chastising me for my advocacy of laissez-faire. He wrote in reply to a comment of mine, sarcastically: "Yes, the free market was tried between 1928 and 1932. It did a wonderful job, too."

Though I disagree with the fundamental outlook of the author, I'm nonetheless very grateful for his reply, particularly the sarcasm. It spurred me to dig further than I had into the history of the period. What I discovered went far beyond just finding evidence to disprove my correspondent's contention. I found that everything being proposed today has been tried and failed, miserably, starting well before Hoover's term, who assumed office in March 1929.

Even so little effort as a casual reading of material on the Herbert Hoover Presidential Library site is enough to show that the 31st president was hardly idle while the country suffered through the Great Depression.

Under the heading of the question: "What did President Hoover do to fight the Depression?" they write, without apology, but apparent pride,
Many people believe that President Hoover did little or nothing in response to the Great Depression. In fact, beginning immediately after the stock market crash in October, 1929, Hoover implemented many ideas to lessen the effect of the Depression and to hasten the recovery.

He directed all Federal Departments to speed up public works and other projects, in order to create more jobs. He directed the Federal Farm Board to support commodities prices and asked Congress to decrease non-essential government spending and use the money to start new public works.

President Hoover called many conferences with industry and finance leaders to encourage voluntary cooperation among businesses to relieve the Depression. Hoover also created the President's Organization on Unemployment Relief to stimulate and coordinate employment and relief efforts.

After the collapse of the European economy in April of 1931 caused the Depression to become even worse, President Hoover called for a temporary suspension of international debt payments, which saved the international banking system from complete collapse. With foreign trade at a standstill, prices for U.S. manufactured goods and farm products fell, and American industries began laying off even more workers.

President Hoover asked Congress to appropriate more money for farm loans and to create the Reconstruction Finance Corporation, which would be used to help financially endangered building and loan associations, agricultural cooperatives, banks and railways.

He proposed federally funded Home Loan Discount Banks to help protect people from losing their homes. He asked Congress to loan $300,000,000 to the states to aid their relief programs, and to transfer agricultural surpluses from the Farm Board to the Red Cross for distribution to relief agencies.[emphases mine]
Long before becoming president, Hoover was equally active in pushing the government to intervene in the economy. He supported Teddy Roosevelt and the Progressive Party in 1912. As Secretary of Commerce under Harding and Coolidge, Hoover was just as busy pushing them to intervene and using his power to intervene himself.

The same pattern of involvement in negotiations between labor and management was present during his Secretaryship. He initiated a campaign called "Own Your Own Home" similar to the later ones of Fannie Mae that contributed mightily to the recent meltdown. He convened conferences to establish standards for traffic control. He played a significant role in regulating radio.

[Also, see the current Vulcan's Hammer post.]

One could go on for pages, but you get the point. This is hardly the picture of a man like Calvin Coolidge who declared, in essence, that fixing the economy is not the government's proper function.

Tragically, neither Washington nor the country at large learned the right lessons from these failed efforts. In fact, just as is about to happen now, they were amplified by the even more ambitious-for-control FDR. There's no telling when, or if, enough people will learn those now more than ever needed lessons and thereby stop those in power from meddling.


There's much more evidence, including these 'gems' from Murray Rothbard's book America's Great Depression:
[Quoting Hoover himself] We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.

... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

... [and]

[N]ot so many years ago – the employer considered it was in his interest to use the opportunities of unemployment and immigration to lower wages irrespective of other considerations. The lowest wages and longest hours were then conceived as the means to obtain lowest production costs and largest profits

... But we are a long way on the road to new conceptions. The very essence of great production is high wages and low prices, because it depends upon a widening ... consumption, only to be obtained from the purchasing-power of high real wages and increased standards of living.


Jason_Pappas said...

Good reminder for those of us who knew! Too bad this is news to the vast majority of people!

As long as the academic community (and high school books) continues the myths about Hoover and FDR, the average person will be ill informed on economics. We haven’t faced a depression since the 1930s and consequently this ignorance hasn’t led to another drawn out decade of economic destruction. I worry we’re about to see a repeat. Obama hinted at such a prospect when he said that the current economic problems may not be solved during a single term in office. He may sabotage a recovery to play savior for the next four years and beyond.

VH said...

Jeff, great post as usual. It seems that history does repeat itself--we are going to live through some terrible financial times because politicians are concerned more with votes than with avoiding past mistakes. Hoover was a Republican that didn't act like one just as Bush. Now we have a progressive that seems to want to be FDR.

Jeff Perren said...

"As long as the academic community (and high school books) continues the myths about Hoover and FDR, the average person will be ill informed on economics."

Good point but you have to wonder, why do so few not make more of an effort to educate themselves? Or, putting the question more positively, what is it about those who do that makes them different, makes them seek out knowledge and verify things independently of what they've been told?

Find a way to bottle that and we'll have started the new revolution.

tashabud said...

If I understand you correctly, you are saying that Hoover's actions during the depression era of his administration were not the right ones? If he didn't try to intervene, what do you think would have been the outcome?


Jeff Perren said...

Hello Tasha and welcome to Shaving Leviathan.

"If he didn't try to intervene, what do you think would have been the outcome?"

That depends on many things, such as what Congress had chosen to do or not do, what you mean by 'intervene', whether not intervening entailed doing nothing versus taking positive action to repeal (or at least oppose) those things which led to the depression, etc.

Assuming Congress chose to go along with 'not intervening' – and that 'not intervening' means doing nothing, there would likely have been a painful, but relatively short (approx 2 year) period of retrenchment. (The admittedly very rough estimate is based on prior downturns.)

During that period, people would have saved, worked, invested — to a lesser degree, certainly, than before — and eventually things would have improved. In other words, left free to go about their business, individuals would have. There is no doubt there would have been suffering, but less and for a shorter period.

Doing nothing — given what he actually did — would have been far preferable. For example, if he hadn't pushed the Smoot-Hawley Act that would have made a large difference (after June 1930 when it was passed, but even possibly prior since its touting in Congress may have played a role in the stock market uncertainty and additional downturn which followed the Oct 29 crash).

If he hadn't removed money from private hands and given it to the RFC to misallocate, that would have helped. If he hadn't raised personal taxes from 25% to 63% and corporate taxes by 15% that would have made a considerable difference. If he had avoided public works projects, which were enormously costly and served (once again) to remove capital from private hands and misallocate resources, that would have helped.

If, on the other hand, Hoover (contrary to his nature and entire adult career) had chosen to work actively to reduce government interference in voluntary trade, both domestic and international, the downturn would have been even milder and shorter.

For example, he could have called for eliminating the income tax and corporate taxes. He could have pushed for eliminating the Federal Reserve — a major villain in producing the downturn. He could have worked to eliminate government favoritism to the farmers. He could have called for overturning many of T. Roosevelt's trustbusting debacles, called for the repeal of the Sherman Anti-trust Act, the Clayton Act, etc., etc., etc.

All these things would not only have had a very near-term material effect — by providing more capital in private hands for investment, building, and production of all sorts — but would have boosted confidence in the entire country. When entrepreneurs and investors have good reason to believe they'll be left free to act — and to profit from their actions — everyone benefits.

It's speculative, but not unreasonable, to suppose there would have been other very positive, large-scale benefits. FDR would almost certainly have lost, sparing the country one of the worst periods of suffering in its history, and thereby not leaving a legacy of economically harmful, liberty-reducing agencies and programs we suffer from still today — such as Social Security, public utilities, and others. It's doubtful America would have become involved in WWII, if it would even have occurred.

That's just a short list off the top of my head.

tashabud said...

Thank you so much for taking the time to respond to my question.

Our political, social, and economic problems are so complex that no simple answers could fix them. Many times, theoritical and speculative answers seem perfect solutions to the problems, but seldom work when applied to actual situations. There are just too many factors affecting one problem, for example, that we can't account for all scenarios inorder to come up with the perfect solution.

I know that Social Security has been a burden to every American, but it's also been a blessing to so many senior citizens over the years. I, for one, is also counting on it when I retire.

Good Night,

Jeff Perren said...


You're welcome. It was a pleasure.

I have to take exception to part of what you said here, though.

I agree that applying general principles to the real world can get pretty complicated and we can't always predict the details. But the broad outlines in some cases are clear.

In the case of the type and degree of controls that Hoover/FDR (and subsequent Administrations/Congresses) have enacted, the jury is in: free markets succeed, legislative directing to achieve desired 'social outcomes' fail. No need to crack our heads looking for 'perfect' solutions, but it's a clear case of "much better" or "very bad."

As to SS, the Fed govt has made certain promises, people have paid into the system in good faith and the Feds are on the hook for delivering. Whether they'll be able to do so in 20 years is an open question.

On the more basic question of whether we should have SS at all, I think everyone would be better served by private retirement insurance. How to get from here to there is complicated and I frankly am not an expert on that subject. Bush's intermediate step seemed like a good idea, but I don't really know the pros and cons intimately.

AJ Witoslawski said...

You might want to check out federal government spending and deficits here:

AJ Witoslawski said...

As for Social Security, abolishing it should not be a problem. We already have a "trust" fund and eliminating the payroll (FICA) tax along with Social Security, Medicare, and Medicaid would create a $300 billion surplus which could be used as a transitionary period from Social Secuirty and Medicare to no state intervention.

Reducing the 1,900 health care mandates that health insurance and health care companies have to jump through would significantly reduce costs. Deregulating would also allow permanently falling costs, just as we've seen with deregulated areas of health care: lasik, plastic surgery, and pet health care.

Jeff Perren said...

Thanks for your helpful comments, Al.