Hoover’s High Wage Policy and the Great Depression

Austrians think Hoover’s “high wage” policy was a major cause of exacerbating the Great Depression, as can be seen in this video by Steve Horwitz (and in the ones that follow in the play list).




While I would not deny it had a negative effect, the trouble with this interpretation is the following:

(1) Hoover’s policy was largely limited to certain industrial markets, and was not generally forced on industrialists.

On November 21 1929, Hoover met with business leaders and labor representatives in the White House. The press release makes interesting reading:

“The conference this morning of 22 industrial and business leaders warmly endorsed the President’s statement of last Saturday as to steps to be taken in the progress of business and the maintenance of employment. The general situation was thoroughly canvassed, and it was the unanimous opinion of the conference that there was no reason why business should not be carried on as usual; that construction work should be expanded in every prudent direction both public and private so as to cover any slack of unemployment. It was found that a preliminary examination of a number of industries indicated that construction activities can in 1930 be expanded even over 1929. ….

It was considered that the absorption of capital in loans on the stock market had postponed much construction and that the flow of this capital back to industry and commerce would now assist renewed construction.

It was the opinion that an indirect but very substantial contribution could be made to the extension of credit for local building purposes and for conduct of smaller business if the banks would freely avail themselves of the rediscount privilege offered by the Federal Reserve Banks.

The meeting considered it was desirable that some definite organization should be established under a committee representing the different industries and sections of the business community, which would undertake to follow up the President’s program in the different industries.

It was considered that the development of cooperative spirit and responsibility in the American business world was such that the business of the country itself could and should assume the responsibility for the mobilization of the industrial and commercial agencies to those ends and to cooperate with the governmental agencies. ….

The President was authorized by the employers who were present at this morning’s conference to state on their individual behalf that they will not initiate any movement for wage reduction, and it was their strong recommendation that this attitude should be pursued by the country as a whole. They considered that aside from the human considerations involved, the consuming power of the country will thereby be maintained.

The President was also authorized by the representatives of labor to state that in their individual views and as their strong recommendation to the country as a whole, that no movement beyond those already in negotiation should be initiated for increase of wages, and that every cooperation should be given by labor to industry in the handling of its problems.”
http://www.presidency.ucsb.edu/ws/?pid=22009

So the “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with.

Vedder and Galloway (1997: 92) – who themselves think that the high wages were the major cause of the unemployment during the depression – nevertheless point out that Hoover received “wholehearted support” from businessmen at his White House meeting on November 21, 1929. Even Henry Ford agreed with it (Vedder and Galloway 1997: 92).

Furthermore, even though there was some degree of “jawboning” of certain business people who wished to cut wages,

“In a survey of business leaders in mid-1930 by Printer’s Ink magazine, corporate executives were near-unanimous in their support of the high-wage policy coming out of the November 1929 conference at the White House. Howard Heinz, the ketchup maker, said: ‘In this enlightened age, large manufacturers . . . will maintain wages ... as being the far-sighted and . . . the constructive thing to do.’ Carleton Palmer, president of E. R. Squibb & Son, advocated increasing hourly wages by reducing the workweek and maintaining weekly wages constant. William Wrigley, the gum magnate, said he would not reduce wages, while Charles C. Small, president of the American Ice Co., said he believed in ‘good wages to aid purchasing power.’ George F. Johnson, president of Endicott Johnson Corp., echoed that sentiment, declaring that ‘reducing income of labor is not a remedy for business depression; it is a direct and contributing cause.’

Big business felt it had a duty to carry through the high-wage-policy.” (Vedder and Galloway 1997: 94)

Now let us assume for the sake of argument that the “high wage” policy really was the single worst policy endorsed by Hoover. But why aren’t Austrians blaming the private industrialists and business people who supported and endorsed this “high wage” policy, since it was clearly their fault as much as Hoover’s? It is doubtful that the “high wage” policy could have been carried out without so much support from the private sector.

Yet in his video “Hoover’s Labor Market Policies” (in the playlist above), Horwitz says that Hoover “persuaded” industrial leaders with the “power of the presidency” not to cut wages, as if this was against their will or against their better judgement. That is untrue: in fact, very many corporate leaders already held the same opinion as Hoover.

(2) Gardiner Means, in his own contemporary work on prices in the 1930s, noted how it was in fact industrial prices that were relatively less flexible than other prices in the US economy during the early years of the Great Depression (Lee 1998: 28).

So, given that relative inflexibility in industrial prices, to what extent did the high wages per se with (less severe) price cuts in those industries really exacerbate the depression? Although it stands to reason that, when industrial prices did start to fall significantly, this would have squeezed profits in the relevant industries, the fact is that output and employment was already directly reduced in many firms anyway as a response to the demand shocks, which were the primary cause of the increased unemployment.

(3) Far from being the solution to the depression, severe wage cuts even in 1929 would have severely worsened the debt deflationary spiral and increased the real burden of debt for debtors, putting pressure on them and eventually driving many into bankruptcy, and in turn driving creditors into bankruptcy. Of course, that is exactly would did happen in the depression as nominal wages fell after 1931 and continued to fall in 1932 and 1933.

(4) I need hardly add that the marginal revenue product theory of wages is wrong, since wages are socially and institutionally determined. It is also nothing short of an article of faith that wages tend to towards some market-clearing level in modern capitalist societies.

The inducement to investment and employ workers is so much more complex than the dynamics of the price of labour analysed as movements along a demand curve under the ceteris paribus assumption. Aggregate demand for output is a fundamental driver of production and employment (Lavoie 1992: 219–220), and the demand shocks resulting from pessimistic expectations (increased savings), falling consumption, loss of savings from bank collapses, and debt deflationary dynamics seem a far more plausible explanation of most of the unemployment during the depression. The US, for example, had a strong (though, admittedly, far from complete) economic recovery after 1933 even though real wages were rising (Bernanke 2000: 31). Clearly, rising average real wages do not necessarily have to result in increased unemployment (see Keynes [1939] for his recantation of neoclassical marginal revenue product theory).

Update
Daniel Kuehn draws attention to these important articles relevant to this issue, one of them by him:

Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843-870.

Kuehn, Daniel. 2012. “A Critique of MacKenzie, Not an Endorsement of Hoover: Reply to Vedder and Gallaway,” The Quarterly Journal of Austrian Economics 15.1: 442-453.

BIBLIOGRAPHY
Bernanke, Ben S. 2000. Essays on the Great Depression. Princeton University Press, Princeton, N.J.

Keynes, J. M. 1939. “Relative Movements of Real Wages and Output,” Economic Journal 49: 34–51.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Vedder, Richard K. and Lowell E. Galloway. 1997. Out of Work: Unemployment and Government in Twentieth-Century America. New York University Press, New York.

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.