That “Liquidationism” Passage in Hoover’s Memoirs

By this, I mean what was full quotation and meaning of the passage in Hoover’s memoirs where Hoover rejected the hard form of liquidationism advocated by Andrew Mellon?

I set out the passage in full:

“The break in the stock market in late October, 1929, was followed by succeeding slumps until, by the end of November, industrial stocks had fallen to 60 per cent of their high point. Even so, the business world refused, for some time after the crash, to believe that the danger was any more than that of run-of-the-mill, temporary slumps such as had occurred at three-to seven-year intervals in the past.

However, we in the administration took a more serious view of the immediate future, partly because of our knowledge of the fearful inflation of stock-market credit, and, in the longer view, because of our fear of the situation of European economy. I perhaps knew the weaknesses of the latter better than most people from my experience in Europe during 1919 and my knowledge of the economic consequences of the Versailles Treaty.

Two schools of thought quickly developed within our administration discussions.

First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:

‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ He often used the expression, ‘There is a mighty lot of real estate lying around the United States which does not know who owns it,’ referring to excessive mortgages.

At great length, Mr. Mellon recounted to me his recollection of the great depression of the seventies which followed the Civil War. (He started in his father’s bank a few years after that time.) He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received time he got back, confidence was growing on every hand; suddenly the panic had ended, and in twelve months the whole system was again working at full speed.

I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago, when we were 75 per cent an agricultural people contrasted with 30 per cent now; that unemployment during the earlier crisis had been mitigated by the return of large numbers of the unemployed to relatives on the farms; and that farm economy itself had been largely self-contained. But he shook his head with the observation that human nature had not changed in sixty years.

Secretary Mellon was not hard-hearted. In fact he was generous and sympathetic with all suffering. He felt there would be less suffering if his course were pursued. The real trouble with him was that he insisted that this was just an ordinary boom-slump and would not take the European situation seriously. And he, like the rest of us, underestimated the weakness in our banking system.

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.

The record will show that we went into action within ten days and were steadily organizing each week and month thereafter to meet the changing tides—mostly for the worse. In this earlier stage we determined that the Federal government should use all of its powers:

(a) to avoid the bank depositors’ and credit panics which had so generally accompanied previous violent slumps;
(b) to cushion slowly, by various devices, the inevitable liquidation of false values so as to prevent widespread bankruptcy and the losses of homes and productive power;
(c) to give aid to agriculture;
(d) to mitigate unemployment and to relieve those in actual distress;
(e) to prevent industrial conflict and social disorder;
(f) to preserve the financial strength of the United States government, our credit and our currency, as the economic Gibraltar of the earth—in other words, to assure that America should meet every foreign debt, and keep the dollar ringing true on every counter in the world;
(g) to advance much-needed economic and social reforms as fast as could be, without such drastic action as would intensify the illness of an already sick nation;
(h) to sustain the morale and courage of the people in order that their initiative should remain unimpaired, and to secure from the people themselves every effort for their own salvation;
(i) to adhere rigidly to the Constitution and the fundamental liberties of the people.”

(Hoover 1953: 29–32).

So two groups existed in the Hoover administration:

(1) the hard liquidationists “headed by Secretary of the Treasury Mellon”, and
(2) a second group including President Hoover, Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde, who wanted to “use the powers of government to cushion the situation.”

But notice those words: “use the powers of government to cushion the situation.” Not “prevent,” “end,” or “reverse” the situation, but “cushion” or mitigate. This was not some announcement of interventions to stabilise GDP, real output or stimulate the economy, but mere measures to “cushion” or lessen its severity.

And the policy aims they advocated are very interesting.

If we strip out the actions that amounted to mere rhetoric (such as “sustaining morale”), we get these:

(a) to avoid the bank depositors’ and credit panics which had so generally accompanied previous violent slumps;
(b) to cushion slowly, by various devices, the inevitable liquidation of false values so as to prevent widespread bankruptcy and the losses of homes and productive power;
(c) to give aid to agriculture;
(d) to mitigate unemployment and to relieve those in actual distress;
(e) to prevent industrial conflict and social disorder;
(f) to preserve the financial strength of the United States government, our credit and our currency, as the economic Gibraltar of the earth—in other words, to assure that America should meet every foreign debt, and keep the dollar ringing true on every counter in the world;
(g) to advance much-needed economic and social reforms as fast as could be, without such drastic action as would intensify the illness of an already sick nation;
…
(i) to adhere rigidly to the Constitution and the fundamental liberties of the people.”

Once thing should be perfectly clear, measure (f) amounted to supporting the gold exchange standard, and was in conflict with the other proposed aims.

Aims (b) and (d) presuppose that a serious depression would occur, and Hoover never declared he wished to avoid depression or end such a depression quickly, just “cushion” or “mitigate” aspects of it. His main way of shunning “hard liquidationism” was merely mitigation of hardship and, above all, avoiding banking panics.

But were the aims and measures Hoover described actually carried out successfully? One can grant that (f) and (i) were more or less achieved.

But the other aims failed badly:

(1) the desire to stop bank runs and loss of deposits – or (a) – which must be judged a terrible failure since around 5,000 banks collapsed under Hoover and there was mass loss of deposits;

(2) there was severe asset price and commodity deflation, so the aim of (b) to “prevent widespread bankruptcy and the losses of homes and productive power” by some kind of “cushioning” was never achieved;

(3) some limited aid was given to farmers, but does anyone seriously think Hoover saved American agriculture from devastation?

(4) there might have been some mitigation of unemployment and relief to unemployed, but it was far short of what was necessary;

(5) America erupted into social conflict and disorder so (e) and (g) were failures.

Hoover’s commitment to saving the banking system was never fulfilled, and for all his announced good intentions, his open market operations were woefully inadequate.

In fact, Hoover essentially admitted this, when he said that Mellon,

“like the rest of us, underestimated the weakness in our banking system.”

Hoover’s aims could never be realised with the feeble and limited interventions he actually pursued, and (arguably) his commitment to the gold exchange standard.

And notice how Hoover never committed himself to any Keynesian solution to the crisis, never announced some massive fiscal expansion or doing “whatever it took” to stop the collapse. He explicitly said later that he utterly rejected the Keynesian solution:

“I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.” (Hofstadter 1968: 259–260).
http://newdeal.feri.org/court/hoover02.htm

So Hoover’s rejection of Mellon’s extreme liquidationism was very limited indeed in its aims, and his rejection of the many later aspects of the New Deal as radical and opposed to “liberty” simply precluded any real policies that could have stopped and reversed the depression.

Even when Hoover directed the state, local and federal governments to continue with public works spending he saw it mostly as a measure for “relief of distress” (Hoover 1953: 42), not to stimulate the economy. Indeed, in fiscal year 1930 (July 1, 1929–June 30, 1930), Hoover ran a federal government budget surplus, which contracted demand from the economy, which demonstrates that he had no understanding of basic Keynesian fiscal policy theory.

That is underscored in his memoir when he announced his disillusionment with the effects of the minimal public works programs (compared to GDP collapse) implemented to that point:

“The first limitation was that the construction and capital goods’ industries were the most sensitive to depression forces. They could mostly be postponed until another day. They could decrease by $8,000,000,000 per annum. To replace such volume with governmental public works would require that much of an increase in government expenses—or a rise of 400 per cent in the taxes of those times. Certainly such works as were possible proved to be no economic balance wheel in depressions.” (Hoover 1953: 144).

In other words, Hoover never saw public works spending as the way to make up for the private investment shortfall, and he implies that such spending would require tax increases. There was no Keynesian justification given for his public works.

Moreover, Hoover never abandoned a concern for a balanced budget. By 1932, he could write of “the urgent need of the country for prompt passage of the emergency legislation and balancing of the budget” through tax increases (Hoover 1953: 136).

And on 5 May 1932 he wrote a message to Congress “devoted solely to the necessity for balancing the budget as the next item on the recovery program”(Hoover 1953: 138; my emphasis). In this letter, Hoover wrote:

“Nothing is more necessary at this time than balancing the budget. Nothing will put more heart into the country than prompt and courageous and united action. ...

The details and requirements of the situation are now well known to the Congress and plainly require:

1. The prompt enactment of a revenue bill [i.e., tax increases]. ...

2. A drastic program of economy [i.e., austerity – LK] which, including the savings already made in the Executive budget of $369,000,000, can be increased to exceed $700,000,000 per annum. (Hoover 1953: 139).

In other words, a balanced budget and austerity were a fundamental part of his “recovery program”!


BIBLIOGRAPHY

Hofstadter, Richard. 1968. Ten Major Issues in American Politics. Oxford University Press, New York.

Hoover, Herbert. 1953. The Memoirs of Herbert Hoover. The Great Depression, 1929–1941 (vol. 3). Hollis and Carter, London.