Blaming Herbert Hoover for the Wrong Reasons

This video below illustrates my point.




So one gets the impression from this (admittedly, by implication) that the interventionist Hoover was pursuing a “New Deal Lite,” and that these interventions were what greatly exacerbated the Great Depression.

I do not deny that some of Hoover’s interventions were counterproductive, nor that Hoover was a limited progressive.

But there is a glaring contradiction here. Steve Horwitz is an Austrian in the monetary equilibrium tradition. Like Hayek, Horwitz thinks that Hoover should have intervened via the Federal Reserve to save the American banking and financial system from collapse (even if as a “second best option”). And I would agree that preventing the bank runs and financial collapse in the early 1930s would have been one of the best government policies to prevent the depth of the Great Depression.

Logically, Horwitz must agree that

(1) Hoover was in theory (if not in practice) right to reject the strict liquidationist solution of Mellon (and incidentally of Murray Rothbard).

(2) Hoover should have intervened in some ways, such as the stabilisation of the banking system;

(3) Hoover’s failure in one important way with respect to the banking crisis is that he failed to properly intervene, and to the proper extent: a laissez faire policy here was entirely wrong.

Yet Hoover gets no credit for rejecting extreme laissez faire liquidationism, which, logically, under Horwitz’s own monetary equilibrium approach, is conceptually the right thing to do.

Let us turn to some of Hoover’s interventions.

First, fiscal policy. Hoover’s fiscal policy in fiscal years 1930 (July 1, 1929–June 30, 1930) and fiscal year 1933 (July 1, 1932–June 30, 1933) was contractionary. In fiscal year 1930, he ran a federal government budget surplus. In fiscal year 1933, he attempted to balance the budget. In fact, in 1932, he 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). Not only was this an urgent need, but he saw it as a “... necessity for balancing the budget as the next item on the recovery program” (Hoover 1953: 138, in a message to Congress, 5 May 1932). Austrians in general seem to be strongly in favour of government reining in spending during a recession and budget balancing. Yet these policy measures of Hoover that are consistent with their policy prescriptions are strangely forgotten as Hoover is accused of being an interventionist on some unprecedented scale.

By contrast, all Keynesians agree that Hoover’s contractionary fiscal policy in 1929–30 and 1932–33 was the wrong thing to do.

In fiscal years 1931 and 1932, fiscal policy was mildly expansionary, but feeble compared to what was needed. Hoover destroyed the US economy not because of government interventions per se, but because of the wrong type of government interventions (i.e., austerity) and government interventions that were too weak and ineffective (i.e., weak fiscal policy).

Secondly, let us consider the Reconstruction Finance Corporation (RFC). Blaming the RFC as some evil government intervention that made the depression worse is absurd. Why? Because the RFC was only established in January 1932, and it did not even exist in 1929, 1930 and 1931 when the US economy was collapsing badly. In 1932, the RFC spent about $1.5 billion in loans to states and businesses, and there are very good reasons for thinking that this policy per se would have aided the economy, not exacerbated the depression. But of course whatever good the RFC did was destroyed by Hoover’s contractionary fiscal policy in fiscal year 1933 – the exact opposite of a Keynesian policy response (at the end of the video, Horwitz mentions in passing a part of this fiscal contraction: the tax increase in 1932–1933).

Finally, the Austrians point to this address by Hoover, as proof of his interventionism and progressive politics.





It does indeed illustrate the limited interventions Hoover pursued, and it is certainly correct that Hoover had a broadly corporatist and limited progressive mentality.

But it also strongly confirms that Hoover’s conceived of his policies as primarily providing relief from privation and distress, not as a set of policies that were supposed to end the depression. Fundamentally, he rejected what we now call Keynesian economics.

It is entirely consistent with Hoover’s description of the major policy aim of his rejection of liquidation, which was merely to “cushion the situation,” or relieve distress:

“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.

....

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.” (Hoover 1953: 29–30).

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 his public works programs in Keynesian terms, and did not conceive of using large deficits to finance such a public works program designed to make up for the shortfall in private sector investment.


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