Political Responses to the Great Depression: Herbert Hoover
I. Background of economic distress
A. Industrial production had declined by 50%. Bankruptcies were widespread. Banks were failing at rate of 600 a month by early 1933. 25% of the work force was unemployed.
B. The unthinkable had happened.
A massive breakdown. A true crisis. Recessions had occurred before--even massive ones like the four year turndown of the 1890s. But every previous bust involved only short term suffering, than things improved. This made previous experience tolerable. Economists claimed such experiences were natural and inevitable and beneficial because they eliminated the inefficient.
This shaped American expectations. In the early years of the Depression it was possible to believe prosperity was just around the corner. Herbert Hoover wasn't being insincere when he assured Americans over and over that there was nothing fundamentally wrong with the underlying state of health of the American economy after the stock market crash of Oct. 1929. He fully and reasonably expected things to improve. He does reveal the limitations of his thinking. Things didn't improve.
The long decline contradicted the conventional economic wisdom of the time. Economists assumed the market economy was self-regulating. The professional economists assumed the market economy had a tendency toward equilibrium: a balance between production and consumption. People won't produce what they could not consume or sell: This was called Say's Law. There can be only short run surpluses and shortages. Since people act on self-interest, if they are free to produce, they will change to a new profitable business. Say's law had important implications for government policy: don't interfere. People must be free to make decisions, to shift production or occupations. But as the economy spiraled down, it become difficult to ignore the absence of a self-regulating or correcting mechanism. First, the economy wasn't righting itself, it was getting worse. Second, it was increasingly difficult to ignore the hardship caused by the depression on all society. People were crying out for relief.
The collapse of the corporate economy highlighted a great paradox: modern industrial-corporate capitalism had transformed productivity, but had collapsed into an unprofitable state. While plenty of food and housing existed, people starved and were homeless. Capitalism's great flaw: it only acknowledged effective demand, not human needs.
People blamed Hoover. The homeless gathered in shanties they named Hooverville. Citizens walked around with pockets turned out: Hoover pockets. At the time Hoover did appear callous, ignorant, banal. He becomes subject to unfair criticism:
The Hooverville Prayer
Hoover is my shepard, I am in Want.
He maketh me to lie down on park benches.
He leadth me beside still factories.
He restoreth my doubt in the Republican Party.
He leadth me in the path of destruction for his party's sake.
Yea, though I walk through the valley of the shadow of destruction, I
fear evil.
For thou art with me, the politician, and professors, they frighten me
Thou preparest a reduction in my salary before me in the presence of my
creditors; thou anointest my income with taxes; my expenses runneth
over.
Surely unemployment and poverty will follow me all the days of the
Republican administration; and I shall dwell in a mortgaged house
forever.
II. Herbert Hoover, 1929-1932
Who was the man who came to be blamed for the economic calamity? Up to the point in 1929, when the economy began its unraveling, Hoover had led a remarkably successful life based on hard work and public service. Hoover was born in a small town in Iowa in 1874. He would live ninety years. He died in 1964. He was orphaned at 10 years old. He was raised by a Quaker family and he embraced the pacifist teachings, plain living and hard work of that religious sect. He was a successful student who worked his way through Stanford University. Here was a genuine self made man. In school he trained as an engineer. He entered the mining industry and within a short time had turned himself into a millionaire. Then he walked away from his engineering career and entered public service. Woodrow Wilson tapped him to run the Food Administration, where he performed humanitarian service feeding the hungry of Europe after the war. He then served two terms as Commerce Secretary under Harding and Coolidge. Presidency was to be his crowning career achievement.
Hoover’s economic philosophy was defined by individualism and volunteerism. Volunteerism meant citizens helping citizens thru private actions, such as charity. He began his presidency as a classical liberal and a believer in Say's law. His initial reaction was to call upon the economic elite to act responsibly toward the welfare of their workers. Calls economic conferences were he suggests capitalists shouldn't lay off workers or cut wages. If they can voluntarily avert depression, no federal government action needed. What State and Local governments chose to do was not his concern. These positions reflected his denial of a fundamentally bad situation. In December 1929 Hoover stated his position as follows: “The fundamental business of this country, that is, production and distribution of commodities is on a sound and prosperous basic.”
Thus, initially it fell on states to assume burdens of recovery or relief. Hoover urged the state governments to adopt public works, and many did. State activism in the face of depressions was not new, it follows historic practices such as debt relief, and unemployment relief. Very quickly states and local governments went bankrupt. Hoover had to do something.
By 1930 Hoover began to act. He first raised the tariff, cut immigration, and cut taxes. The first two components of his program pointed toward external causes of the economic crisis. In raising the tariff, U.S. policy made it more difficult for other countries to stimulate their economies by selling goods to the U.S. In targeting immigrants, Hoover unleased a virulent deportation attack on Mexicans throughout the Southwest. Cutting taxes was a typical fiscal policy of the time, but it was not sufficient to stimulate economic growth.
In Congress energy was building for a Public Works program. Not until 1931 did Hoover propose a public works program. Minor public works programs passed in 1931 and 1932. These programs allowed Hoover to spend $300 million. In context of declining revenues and increased spending Hoover's government experienced a deficit. The largest peacetime deficit in American history: $2B!
Reconstruction Finance Corporation represented the final element of Hoover’s recovery program. Created in 1932. Hoover accepts actions to stimulate the economy through government loan program. Critics accused Hoover of taking an Ad hoc approach to recovery and of cronyism. The RFC made loans to businesses in distress: a bailout: $5 billion. 59% of loans go to banks; 16% to railroads. Hoover’s program offered billions to business and nothing to anyone else. Would there be direct relief to address the widespread suffering of the masses? No. Hoover remained true to the old ways of arguing that all relief was the responsibility of local or state governments.
In the Election of 1932, Hoover ran on platform that claimed he had the most extensive anti-depression program ever witnessed in American history. To liberals this was laughable. Hoover appears conservative and callous. To conservatives Hoover did break with tradition-the tradition of doing nothing and letting the economy right itself on its own through sheer liquidation or purging. This criticism reflects their bias in favor of the self-correcting market.
Poor Hoover became caught in the middle of a left that demanded extensive intervention, and a right that called for the old standpatism. He spent the rest of his long life trying to live down these criticisms.