Wednesday, July 17, 2013

Herbert Hoover Myths?

If you believe this video, then Herbert Hoover was a quite serious interventionist, whose government interventions allegedly exacerbated the Great Depression.

I have gone though the major issues raised in these Austrian charges against Hoover before in these posts:
“That ‘Liquidationism’ Passage in Hoover’s Memoirs,” April 9, 2013.

“Herbert Hoover Rejected Keynesianism,” April 9, 2013.

“Steven Horwitz on Herbert Hoover: Mostly Misleading,” February 20, 2012.

“What Hoover Should have Done in 1931,” January 26, 2012.

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.

“Smoot Hawley and the US Contraction of 1929–1933,” February 26, 2011.
But I can review the important points below.

(1) It is indeed true that Hoover was not a liquidationist. Hoover is unfairly caricatured as an advocate of the extreme liquidationist solution to the Great Depression, a solution which was actually recommended by Andrew Mellon (US Treasury Secretary from 1921–1931). Hoover rejected extreme liquidationism, and attempted to fight the onset of the Great Depression with a number of limited interventions, including increased government spending.

Hoover described the situation in his memoirs:
“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).
But Hoover’s interventions were mostly designed to “cushion the situation” and “mitigate the privation among the unemployed” – not to rapidly end the depression with the necessary level of fiscal stimulus in the way a Keynesian would advocate.

In fact, Hoover said explicitly that he rejected Keynesianism:
“During my four years powerful groups thundered at the White House with these same ideas [i.e., the ideas of Roosevelt’s New Deal – LK]. Some were honest, some promising votes, most of them threatening reprisals, and all of them yelling ‘reactionary’ at us.

I rejected the notion of great trade monopolies and price-fixing through codes. That could only stifle the little businessman by regimenting him under the big brother. That idea was born of certain American Big Business and grew up to be the NRA [National Recovery Act].

I rejected the scheme of ‘economic planning’ to regiment and coerce the farmer. That was born of a Roman despot fourteen hundred years ago and grew up into the AAA [Agricultural Adjustment Act].

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.

I defeated other plans to invade State rights, to centralize power in Washington. Those ideas were born of American radicals.

I stopped attempts at currency inflation and repudiation of government obligation. That was robbery of insurance-policy holders, savings-banks depositors and wage earners. That was born of the early Brain Trusters.”
A look at the fiscal details of his administration confirms that he was not lying.

(2) Regarding Smoot Hawley, while it undoubtedly hurt foreign export-led growth nations dependent on the US market, it was not a major factor in the US contraction from 1929–1933, as Peter Temin has argued:
“A tariff, like a devaluation, is an expansionary policy. It diverts demand from foreign to home producers. It may thereby create inefficiencies, but this is a second-order effect. The Smoot-Hawley tariff also may have hurt countries that exported to the United States. The popular argument, however, is that the tariff caused the American Depression. The argument has to be that the tariff reduced the demand for American exports by inducing retaliatory foreign tariffs … Exports were 7 percent of GNP in 1929. They fell by 1.5 percent of 1929 GNP in the next two years. Given the fall in world demand in these years from the causes described here, not all of this fall can be ascribed to retaliation from the Smoot-Hawley tariff. Even if it is, real GNP fell over 15 percent in these same years. With any reasonable multiplier, the fall in export demand can only be a small part of the story. And it needs to be offset by the rise in domestic demand from the tariff. Any net contractionary effect of the tariff was small” (Temin 1989: 46).
(3) Regarding Hoover’s idea of maintaining high wages, he was not simply forcing this policy on huge numbers of unwilling corporate leaders: first, it was mostly a voluntary policy and, secondly, the idea had permeated the corporatist thinking of many business people in the 1920s.

Many influential industrialists actually supported it; Hoover was basically articulating an influential opinion they already held, and whatever harm it did as prices fell, one must blame the private sector just as much as Hoover.

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

Temin, P. 1989. Lessons from the Great Depression. MIT Press, Cambridge, Mass.


  1. I forsee Austrian commentors claiming the non-Keynesian policies of Hoover and FDR prove Keynes was wrong about everything. Reading back through comments on previous posts on this topic it becomes clear Austrians cannot grasp the technical details of Keynes work, their arguments amounting to some formulation of: "Keynes said deficits fix stuff, the government ran a deficit and it didn't work.". When confronted on this they will engage in obfuscation and moving of goal-posts so as to avoid dealing with data contrary to their assertions.

    It really is like they all read from the same script.

  2. LK, this might interest you:

    'The complete history of US real estate bubbles since 1800'

  3. Out of curiosity Lord Keynes...did you see this exchange in the Quarterly Journal of Austrian Economics between Douglas W. MacKenzie, Daniel P. Kuehn, and Richard Vedder and Lowell Gallaway? (The latter pair sided with D.W. MacKenzie.) If not, I'll show you the exchange in order of appearance.

    First, Douglas W. MacKenzie published an article in a 2010 issue of the Quarterly Journal of Austrian Economics.

    MacKenzie, Douglas W. 2010. "Industrial Employment and the Policies of Herbert C. Hoover." Quarterly Journal of Austrian Economics 13, no. 3: 101–119.

    Daniel P. Kuehn then responded in the winter 2011 issue of the Quarterly Journal of Austrian Economics.

    Kuehn, Daniel. 2011. "Hoover and Wages in the Depression: A Comment on Douglas MacKenzie." Quarterly Journal of Austrian Economics 14, no. 4: 442–453.

    Daniel P. Kuehn's comment on D.W. MacKenzie's piece cited the following article in The Journal of Economic History by Jonathan D. Rose, which appeared in roughly the same time period as D.W. MacKenzie's comment.

    Rose, Jonathan D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression.” The Journal of Economic History 70, no. 4: 843–870.

    In the same issue, two economists, Richard Vedder and Lowell Galloway, gave the following rejoinder and sided with D.W. MacKenzie's 2010 article.

    Vedder, Richard, and Lowell Gallaway. 2011. "Hoover and Wages in the Depression: A Comment on Douglas MacKenzie: A Rejoinder." Quarterly Journal of Austrian Economics 14, no. 4: 454–461.

    Finally, in the first issue of the 2012 volume of the Quarterly Journal of Austrian Economics, Daniel P. Kuehn gave the following reply to Richard Vedder and Lowell Galloway:

    Kuehn, Daniel. 2012. "A Critique of MacKenzie, Not an Endorsement of Hoover: Reply to Vedder and Gallaway." Quarterly Journal of Austrian Economics 15, no. 1: 143–147.

    I'd like to know your thoughts on this matter if you don't mind sharing them with me, Lord Keynes.