Common wisdom about the Great Depression seems to be that Herbert Hoover was a free market, laissez-faire kind of guy, who mistakenly decided to “do nothing” and let the economy work itself out…merely watching as it spiraled down the drain.
The rap on Hoover couldn’t be more wrong, says legendary libertarian economist Murray Rothbard. Hoover is actually the guy who made the Great Depression what it is!
Rothbard’s book America’s Great Depression is considered by many to be the finest account of what happened economically and politically in America between 1929 and 1932. (You can download a free copy here, courtesy of Mises.org).
Rothbard believes (as do I) that the severity of a depression is directly proportional to the amount of government intervention directed at “fixing things.” He contrasts America’s depression of 1920, which lasted less than a year, with the Great Depression, which just about dragged out into World War II.
America used to have depressions all the time. The 19th century and early 20th century are peppered with them. They were always short and sweet, because the US government was not yet large or powerful enough to really do anything about them. So the panics would come and quickly pass…excesses would be removed from the system…and the path would be clear for the next economic upturn.
The last time the US government pursued a mostly laissez-faire policy in handling a recession/depression was 1920-1921. Warren Harding was president – so it’s not hard to imagine he had a difficult time keeping his hands off the levers, because Harding was widely regarded as one of the least qualified presidents in American history. He’s the guy who Republicans believed just looked like a president – so they dressed him up, and sure enough, he was eventually elected into office.
Ironically, the man Harding appointed as Secretary of Commerce in March 1921 was none other than Herbert Hoover, who only accepted the position on the condition he’d be able to meddle in government economic policy. So Hoover quickly set to work in 1921 by mapping out boneheaded designs for public works projects and other central planning types of activities.
Fortunately for the US, the depression ended before Hoover was able enact any of his programs. But the stage was set for the big dance, coming up at the end of the decade.
When the stock market crashed on October 24, 1929, Hoover kicked into gear right away and started “doing stuff”. He ignored his laissez-faire Secretary of Treasury Mellon, who famously advised him to:
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. 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 from less competent people.”
Hoover honestly believed he could halt the depression freight train himself. He immediately called a series of conferences at the White House with top business leaders, in an effort to persuade them to maintain their wage rates and expand investments.
Rothbard writes that Hoover even phrased the purpose of these conferences as “the coordination of business and governmental agencies in concerted action,” which also seems to rhyme with today’s cries that capitalism can’t do it alone without government.
By the end of the year, Hoover was able to coerce the country’s leading industrialists into pledging to “maintain wage rates, expand construction, and share any reduced work.” Thus the invisible hand of the market was replaced by the iron fist of Uncle Sam.
While most understand the Great Depression as a deflationary time, Rothbard writes that it wasn’t for a lack of effort on the part of the Fed:
If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state.
The result? Green shoots!
President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates.
And by the end of 1929, Hoover had also:
- Urged an aggressive expansion of all state public works programs
- Instituted farm subsidies and price supports
- Enacted rules to discourage commodity speculators
Talk about a panicked two months!
Cutting off international trade is at best a bad idea in good times, but a disastrous idea at a time of severe economic hardship.
Hoover continued his crusade to keep wage rates propped up – focusing on maximum employment. Employers’ were severely hamstrung in their ability to unload marginal employees. Laws were passed that dictated how many hours construction employees could work on federal projects.
In addition to these gems, he tried just about every remaining misguided economic move that we haven’t yet discussed. He went after short sellers. He restricted oil production in the name of conservation. He enacted one of the largest tax increases in the history of the US.
In conclusion, Hoover was a socialist bum who did not have a free market bone in his body. Kudos to Murray Rothbard for exposing him as the fraud that he is. I’ll leave you with this inane quote from Hoover in his doomed 1932 reelection campaign, which illustrates exactly how clueless this guy was:
[W]e might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.