Alternative Insight
Herbert Hoover and the New Depression
On November 2 1928, no American was more admired than the newly elected President Herbert Hoover. Although representing himself as a Republican, Hoover had the reputation as the most progressive politician ever to be elected to the Executive Office. United Mine Workers leader John L. Lewis called him "the foremost industrial statesman of modern times." [1] Although later events changed his attitude, the 1924 Progressive Party candidate Robert LaFollete exulted in Hoover's election. Herbert Hoover could have run on the Communist party ticket and been elected.The former Secretary of Commerce gave hope to the aspirations of everyone. Workers, unions, farmers, impoverished, African-Americans, Native-Americans, and others enthusiastically greeted his initial pronouncements to improve their plights. Two years later, with the Depression and its unemployment escalating, the public abruptly changed its sympathetic attitude to the new president. It perceived him as callous, unaware of the misfortunes of his fellow citizens, cold and indifferent to their needs. Herbert Hoover, the man who could do no wrong, became Herbert Hoover, the man who didn't know right from wrong. A cartoon showed him being kidnapped with his kidnappers demanding ransom or they would return HH to the White House.
What happened, why did it happen and, most importantly, what lessons did his administration have for other major economic crises?
Who was Herbert Hoover?
What were his policies?
What motivated his apparent negligence?
What is his legacy to the present economic crisis?Herbert Hoover the Man
A mining engineer who became independently wealthy by the age of 35, Herbert Hoover achieved a reputation as the Great Humanitarian. He deserved that title.Humanitarian efforts began immediately after the outbreak of World War I when he organized a group of U.S. businessman to form a "Committee of American Residents in London for Assistance of American Travelers." His group raised and disbursed some $400,000 to assist stranded Americans to get home. Almost every dollar was repaid. {2}
As chairman of the 1914 "Commission for Relief in Belgium," he saved thousands of Belgians from starvation. Through his own efforts, Hoover raised millions of dollars and personally organized the logistics for providing food to a nation that faced mass starvation due to the wartime conditions.
After World War I hostilities ceased, Europe faced destitution. "Hoover was asked by the leaders of the Allied governments, assembled in Paris for the Peace Conference, to take charge of provisioning the hundreds of millions. He accepted, saying that if the well-to-do would share and give, a tragedy might yet be-
come a triumph. For eleven months Hoover did not take a day off, never went into a shop-others bought his clothes-and ate on the run." [3]His attitude towards starving Russians clarified his fairness and dedication to humanitarian efforts.
"The Russian author Maxim Gorki wrote Hoover asking if Communist Russia might not be helped. Hoover replied that he could feel for the sick and starving of the country, and that if given a free hand he would do what he could. The Soviet diplomat Maxim Litvinov worked out the details which allowed for the liberation of all American prisoners in Russia and the right for members of the American Relief Administration to travel with no impediments. The entire distribution was on an entirely nonpolitical basis. Eighteen million Russians profited. Gorki wrote, 'You have saved from death three and one-half million children, five and one-half million adults.'"[4]In 1927, the U.S. suffered from its worst natural disaster, the Mississippi River flood. President Coolidge appointed Secretary of Commerce Hoover to coordinate rescue and relief in the Mississippi valley. Compare the former Commerce Secretary's efforts to George W. Bush's photo-ops during the New Orleans flood. "Hoover swiftly took command, He set up headquarters in Memphis on the Chickasaw Bluffls, high above the raging river, but he spent most of the next three months traversing the valley in a private Pullman car-moving ceaselessly from Cairo to New Orleans and back again, often sleeping on the train or a boat....He sparked a fund- raising drive that brought in $17 million; gathered an armada of six hundred vessels; and put together I50 tent cities as havens for multitudes of evacuees." [5}
Herbert Hoover also became known as the Great Progressive. As a private citizen, as a Secretary of Commerce, with a subsidiary title of undersecretary of all departments, and as the 31st U.S. president, the record of his stance on all issues validates that title.
The Interventionist
During World War I, Hoover urged Wilson to push for a tax on excess profits and "rebuked Social Darwinists by saying that 'civilization spells the protection of the helpless.' . . . While carrying on a cordial dialogue with the head of the American Federation of Labor Samuel Gompers, he told the Boston Chamber of Commerce that 'industry must be humanized,' and the work force regarded not merely as a cost of production, but as a living agent, with human instincts and social wants.'"[6]As early as December 1919, Hoover advocated a department of public works, a federal employment service, and home-loan banks. "He was chief author of a report to the president recommending a minimum wage, a forty-eight-hour work week, the eradication of child labor, improved housing, and equal pay for men and women....He deplored injunctions against strikes, non-trial by jury of reds, and the expulsion of legally elected Socialist legislators in New York State." [7]
Murray Rothbard, well known Libertarian economist from the super free enterprise Ludwig Von Mises institute, confirmed the belief of Hoover the Interventionist:
"Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the 'Hoover New Deal.' For if we define 'New Deal' as an antidepression program marked by extensive governmental economic planning and intervention-including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works)-Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. ...To scoff at Hoover's tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover route must be set down as a failure of government planning and not of the free market."[8]Economy
From the beginning of his public career, Herbert Hoover recognized the failures and limitations of the free enterprise system, and proposed polices to correct economic problems. During his term as Secretary of Commerce, he became aware that credit drove the economy and excess credit would drive the economy to ruin. He "protested to President Coolidge about the easy-money policies which encouraged the mad stock market speculation. And he told the Federal Reserve Board it was utter folly to permit the speculators to run wild with their purchases of stock on 90 percent margin-ten cents down to own a dollar worth of stock." [9]As if understanding Karl Marx's Theory of Surplus Value, on December 3 1928, Hoover stated to Congress:
"I have instituted … systematic … cooperation with business … that wages and therefore earning power shall not be reduced and that a special effort shall be made to expand construction … a very large degree of individual suffering and unemployment has been prevented." Major business leaders pledged not to lower wages, and to form a permanent national economic council to deal with emergencies.After the Stock Market crash, the new president ordered federal departments to speed up construction projects, cut $160 million in taxes, and doubled the amount spent on public works. The government itself pledged to increase its public building program from $248,000,000 to $423,000,000.
The Emergency Committee for Employment, created in 1930. was chartered to coordinate efforts between other agencies in order to provide relief for the massive unemployed during the years of the Great Depression.
On July 22,1930 the President signed an act allowing the lending of one hundred and twenty-five million dollars to homeowners unable to obtain loans
from private sources. He also signed a bill allocating more than two billion dollars for loans to states and municipalities for local relief and for the financing of
public works.The National Credit Corporation, created in 1931, attempted to persuade the largest banks to provide lending agencies that would be able to give banks, on the brink of foreclosure, money that could be used for loans.
Maybe a bit too late, the Reconstruction Finance Corp., (RFC): created in 1932, was designed to give out loans to banks, railroads, and monopolistic companies in order to pump money back into the economy during the years of the Depression.
Taxes
"The less well-off, he believed, should pay no taxes at all, and he opposed excises on necessities. "I would like to see,' he declared, 'a steeply graduated tax on legacies and gifts . . . for the deliberate purpose of disintegrating large fortunes'" [10]The Hoover administration tax bill in 1932 featured the largest tax increases up to that date. The bill raised the top income tax rate from 25% to 63% and the lowest tax rate from 1.1% to 4%. "The estate tax was doubled and corporate taxes were raised by almost 15%. Also, a "check tax" was included that placed a 2-cent tax (over 30 cents in today's dollars) on all bank checks. Economists William D. Lastrapes and George Selgin conclude that the check tax was 'an important contributing factor to that period's severe monetary contraction.'" [11] Planned to achieve a balanced budget, the budget unexpectedly had a huge deficit. Due to the severe Depression, income tax revenues continued to decline, from $834 million in 1931 to $427 million in 1932 to $353 million in 1933.
Agriculture
In 1929, Hoover established the Federal Farm Board after passage of the Agricultural Marketing Act. By buying food production, the Farm Board, which promoted Cooperative Commodity Marketing, sidetracked from the market any temporary surpluses that would depress prices. By enriching the Federal Farm Loan Banks with a billion dollars to building and loan associations, Hoover enabled farmers to fight foreclosures. "He wanted more farmers to have the advantages of cooperatives that butter marketers enjoyed with Land O'Lakes Creameries and orange growers with Sunkist."[12]In 1931 the Federal Home Loan Act created. a five man Home Loan Board with banks to handle home mortgages and provide funds to homeowners.
Social
The Norris-La Guardia Act of 1932 forbade the issuing of injunctions to maintain anti-union contracts of employment, the prevention to perform work, and the restraining of an act committed by either a group or of an individual striker.Secretary of Commerce Hoover "quietly integrated the Census Bureau and established the post of adviser on black economic development, and gave particular attention to the plight of African Americans. He asked the Red Cross to place more blacks on its payroll, and he demanded that it determine whether "colored people are being restrained in the camps against their will, . . . are being tagged for return to specific plantations, [and] are being charged by Red Cross for food. When the NAACP exposed abuses, he authorized Robert Russa Moton, Booker T.Washington's successor as head of Tuskegee Institute, to investigate. Hoover's concern went far beyond these steps. He saw the crisis as nothing less than an opportunity to reconfigure southern society. With singular foresight, he proposed the subdivision of plantations into small homesteads that tenants, notably African Americans, could buy, with the program to be financed by a private resettlement corporation." [13]
Conservation
The Boulder Dam, renamed Hoover Dam due to Herbert Hoover's instigation of the 1929 legislation that approved its construction, provides flood control, electricity, and irrigation for farms. It was constructed between 1931 to 1935 and began operations in 1936.As Secretary of Commerce, and "undersecretary of all departments," Hoover advanced conservation, which was traditionally reserved to the interior Department. "He intervened to preserve the natural assets of Niagara Falls; organized a conference to save Chesapeake Bay; attempted to halt the diminution of Alaska's salmon fisheries; and prided himself on being 'the arch anti-pollutionist in the country' Concerned about oil slicks fouling oceans, bays and estuaries, he demanded 'very drastic regulation' and expressed disappointment when Congress yielded to oil tycoons in eviscerating 'my pollution bill.' ... Under his leadership, the agency worked out water sharing among seven quarrelsome states that made possible an ambitious project in Boulder Canyon that later bore the name Hoover Dam."[14]
President Obama should know that Hoover needed only nine days in office before banning oil exploration on public lands. Within one year, his government canceled more than twelve thousand leases.Latin America
Unlike President Jack Kennedy's Alliance for Progress policy towards Latin America, which involved no alliances and little progress., President Herbert Hoover's Good Neighbor policies demonstrated action. On November 19, 1928, he voyaged to ten Latin American nations and informed several he intended to end U.S. military presence in their nations.
"Hoover's policies implied a revised conception of the Monroe Doctrine. ...The more than twenty insurrections that erupted in Latin America during Hoover's four years strongly tested his resolve. So too, did regimes that repeatedly angered U.S. investors by defaulting on bonds. But Hoover, for the most part, exercised restraint. His administration recognized an insurgent junta in Bolivia despite its anti-American tendencies, and when the U.S. minister to Costa Rica, in the midst of an uprising, asked for two warships, he was turned down. Hoover did not even blink an eye when a revolution.flared up in Panama near the indispensable canal." [15]
Negligence in combatingthe Great Depression
Herbert Hoover's principal error in combating the Depression was his belief in having balanced budgets to maintain the dollar and reduce interest rates. Although aware of the role of credit in sustaining the economy, the Depression president made no effort to replace the declining credit with federal deficits. Instead he relied on and petitioned the Federal Reserve, the agency most responsible for regulating the money supply, to ease credit restrictions after the Depression escalated. A 1930 Fed increase of the discount rate and its failure to assist distressd banks, together with 1932 tax increases, evidently caused a huge drop in the money supply during the year 1932-1933.Graphs of Money Supply [16] and federal deficits describe the relation between the former and the latter. After the 1929 stock market crash, the money supply (M1) fell rapidly due to shrinkage of credit, bankruptcies and bank failures. The Money Supply recovered quickly after federal deficits occurred with the Roosevelt administration. Note the drop in Money Supply during 1937-1938 when government spending approached a balanced budget.
Hoover is also criticized for his failure to veto the Smoot-Hawley tariff bill. Wanting only tariffs to benefit agriculture, Hoover, although he signed the measure, opposed the expanded bill and called it "vicious, extortionate, and obnoxious." It undermined the commitment he had pledged to international cooperation. Total imports fell from $5.5 billion to $1.9 billion. However, exports decreased in a similar quantity, falling from $5.9 billion to $2.0 billion. The trade balance remained constant, but the tariff might have degraded Europe's economic situation and indirectly affected U.S. exports. Unknown - what would have been the trade decreases without the increases in tariffs in a world economy suffering from a growing Depression? Nevertheless, deleterious effects from Smoot Hawley must have been more reactive rather than pro-active in a $91 billion economy (GDP), already quickly declining trade, and Great Britain's exit from the Gold Standard. The tariffs continued through the Roosevelt administration and global tariffs didn't become formally re-adjusted until General Agreement on Tariffs and Trade (GATT), in the 1950s. Despite the uproar against Smoot-Hawley, "The American Tariff League Study of 1951 which compared the effective tariff levels of 43 countries found that only seven countries had a lower tariff level than the U.S. (5.1%). Eleven countries had effective tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43-country average was 14.4% ± 0.9% higher than the U.S. level of 1929." [17}
The Depression president's principle faults in providing solutions to the severe economic crisis were philosophical and personal. Hoover believed the Federal government should serve all the people and not any particular interest. A balanced budget required a balanced view of the needs of the nation. Appropriations should have long term beneficial effects and not just temporarily ameliorate a problem. He stressed action before words, cooperation before individualism and persuasion before dictation. Sensitive to his own dedicated and successful efforts, which he performed outside of government activities, he promoted volunteerism, soliciting all Americans to "not rely on government but on civic minded individuals imbued with a spirit of self sacrifice. A socially responsible economic order could only be brought about by the voluntary action of capitalist leaders and not through governmental persuasion." From this naive notion, Hoover assumed that state and local governments, charitable organizations and generous citizens would recognize the plight of the unemployed and provide sufficient care for them.
The psychological also played a role in his attitude. "Our general view was that the irregular tempo of economic movements could never be smoothed out in a free system. it generated its own rhythm which in turn was influenced by the ebb and flow of optimism." He sincerely believed that the if public adopted a more positive attitude, did not fear borrowing, lending, spending, investing and trusting, the economic conditions would stabilize.
Despite his calls to volunteerism and optimism, Hoover was unable to convey his message. He lacked charisma and rhetoric. His communication skills to a wide audience were nil. He gathered leaders in banking, insurance and loan companies and told them that the country was gripped with foolish alarm. He asked the financial community to "cease calling loans, to reach out to find people and situations in which to invest money." He asked the richer banks to set up a fund to help the poorer banks. The result: "These rich and eminent leaders saw a man who, according to the authors Roy Peel and Thomas Donnelly, 'invariably appeared solemn and sad, an unhappy man, a man without hope. lnstead of radiating confidence and good cheer in the presence of the economic crisis, his portraits made one want to sell short, get the money in gold, and bury it.'...It was after midnight when the President and the men parted. The next day they went to their banks and offices and immediately began to call in loans so they might hoard what they had. Hoover had returned to the White House more depressed than ever before in his life." [18]
Legacy
Only two presidents, Herbert Hoover, 31st president of the United States, and his successor, Franklin Delano Roosevelt, left legacies that can illuminate the difficulties in overcoming the George W. Bush Depression. No doubt that Hoover's administration failed, but even failure is an appropriate study for action. Although Roosevelt's administration did not resolve unemployment until the entrance of the United States in World War II, his polices are constantly recited and guide the economic thrust of Obama's administration.Hoover's most important legacy is: "Don't let it happen. Once it happens, there isn't much you can do." Before becoming the chief executive, Hoover reproached the country's leaders for allowing easy credit to grow to unaffordable limits and for the money supply to be diverted to speculative ventures. Presidents Clinton and George W' Bush and Federal Reserve chairman Greenspan remained unaware of this edict.
Early programs of intensive interventions, as described previously, including tax cuts, had no apparent effects in slowing the economic decline. On the other hand, the tariff bill might have slightly intensified the Depression. The balance budgets,which only occurred during the first two years, were the principal error. Raising taxes in 1932 to prevent huge budget deficits only lowered the deficit without lowering unemployment. The defining mistake was not Hoover's; it was the Federal Reserve policies, which contradicted Hoover's request to the Reserve, and whose contradictions he could not control. The Federal Reserve raised the discount rate (to prevent gold outflows) and did not engage in Open Market operations which, by purchasing bonds, would have increased the money supply and provided funds to sinking banks.
Maintaining wages, lending of one hundred and twenty-five million dollars to homeowners unable to obtain loans, establishing an Emergency Committee for Employment, a National Credit Corporation, a Reconstruction Finance Corp, a Federal Farm Board, and a Home Loan Board did nothing. Why?
Evidently, the programs were not properly administrated. Even if they were, government efforts could never be sufficient. Similar to today, recovery lacked private initiatives. Greed, which caused Depression, prevented assistance to stop Depression. The eager proponents of free enterprise claim: "The government cannot create jobs. Only private industry can create jobs." However, President Obama's Stimulus Plan has created all the new jobs and prevented a susbtanial loss of other jobs. Private industry has done nothing to lower unemployment.
Another reason is there was no China at that time, no nation that escaped the Depression, no nation that could maintain world trade and recirculate dollars. Other reasons- The Gross National Product descended at a rapid rate, down almost 30% in three years, while unemployment ascended quickly, increasing from 5% to 25% in only 2.5 years. Both were moving targets that evaded the cross hairs. The special qualities of the 1929 Depression, which included global financial reliance on a Gold standard, defied solution. The following graphs describe the scope of the problem.
Note the speed of the declines in GDP and employment. Also notice that the outcome of Obama's policies of severe deficit spending resemble Roosevelt's results - an immediate halt to a fall in GDP followed by its gradual rise, and minor reduction in unemployment. Both president's policies assisted those who already had sustenance while elevating corporation profits. Despite the rhetoric, recovery did not relieve the burdens of the unemployed. The graphs show that only complete government control of the economy during World War II brought America out of the Depression. It also shows that the militarist and fascist nations recovered quickly.Their leaders did not request; they dictated. Every citizen became a volunteer.Hoover's lasting legacy contrasts with that of Roosevelt.
Herbert Hoover's principal legacy is that of an attempt to re-engineer government, make it more efficient, more responsive to citizen's needs and be driven by cooperation with all society's sectors, without favoring any of them. Although Hoover changed his appeals after 1932, Rex Tugwell, one of FDR’s brain trust, wrote: “We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs Hoover started.” Although his measures were incipient, Hoover set the stage for government intervention in many aspects of society; conservation, race relations, agriculture, labor relations.The principal legacy of FDR, known for his depression fighting techniques, was actually the re-engineering of the political system. The dominance of only a few special interests in each political Party became challenged by new constituencies, unionized labor, women, African-Americans, retirees, internationalists, isolationists, political clergy, militarists. The Republican combination of mid-west farmers and Northern businessmen soon disintegrated into the joining of conservative patriots and southern segregationists with an industrial-military complex. The Democrat combination of Southern racists and Northern liberals morphed into organized labor, African-American voters, minority groups, social liberals, women rights, and community organizers. In 2011, the two major political Parties have no challengers and, rather than representing distinct constituencies, misrepresent their causes.
Bibliography
(1) Herbert Hoover, William E. Leuchtenberg, Times Books, 2009, P. 77
(2) ibid, P. 25
(3) The Shattered Dream, Gene Smith, William Morrow & CO., 1970, P. 38
(4) Ibid, P. 41
(5) Herbert Hoover, William E. Leuchtenberg, P. 68
(6) ibid, P.45
(7) ibid. P. 46
(8) Part III The Great Depression: 1929-1933, chapter 7 Prelude to Depression: Mr. Hoover and Laissez-Faire
http://mises.org/rothbard/agd/chapter7.asp#7
(9) The Shattered Dream, Gene Smith, P. 57
(10) Herbert Hoover, William E. Leuchtenberg, P. 59
(11) http://en.wikipedia.org/wiki/Herbert_Hoover
(12) Herbert Hoover, William E. Leuchtenberg, P. 83
(13) ibid, P. 69
(14) ibid, P. 59
(15) ibid, P. 120
(16) Bernanke vs. Irving Fisher and Hyman Minsk by AR Geezer, Jun 17th, 2010, http://www.eurotrib.com/story/2010/6/17/1364/80156
(17) http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act#End_of_the_tariffs
(18) The Shattered Dream, Gene Smith, P. 63alternativeinsight
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