America's Great Depression (33 page)

17Cited in Joseph Stagg Lawrence,
Wall Street and Washington
(Princeton, N.J.: Princeton University Press, 1929), pp. 437–43.

18
Commercial and Financial Chronicle
(April, 1929): 2204–06. Also see Beckhart,

“Federal Reserve Policy and the Money Market,” in Beckhart et al.,
The New York
Money Market
(New York: Columbia University Press, 1931), vol. 2, pp. 99ff.

19See Joseph Dorfman,
The Economic Mind in American Civilization
(New York: Viking Press, 1959), vol. 4, p. 178.

Theory and Inflation: Economists and the Lure of a Stable Price Level
181

Influential British Labourite Philip Snowden urged in 1927 that the United States join in a world plan for price stabilization, to prevent a prolonged price decline. The London
Statist
and the
Nation
(London) both bemoaned the Federal Reserve “deflation.” Perhaps most extreme was a wildly inflationist article by the respected economist Professor Allyn A. Young, an American then teaching at the University of London. Young, in January 1929, warned about the secular downward price trend, and urged all Central Banks not to “hoard” gold, to abandon their “high gold reserve-ratio fetish,” and to inflate to a fare-thee-well. “Central banks of the world,” he declared, “appear to be afraid of prosperity. So long as they are they will exert a retarding influence upon the growth of production.”20

In an age of folly, Professor Young’s article was perhaps the crowning
pièce de résistance
—much more censurable than the superficially more glaring errors of such economists as Irving Fisher and Charles A. Dice on the alleged “new era” prosperity of the stock market. Merely to extrapolate present stock market conditions is, after all, not nearly as reprehensible as considering deflation the main threat in the midst of a rampantly inflationary era. But such was the logical conclusion of the stabilizationist position.

We may conclude that the Federal Reserve authorities, in promulgating their inflationary policies, were motivated not only by the desire to help British inflation and to subsidize farmers, but were also guided—or rather misguided—by the fashionable economic theory of a stable price level as the goal of monetary manipulation.21

20Allyn A. Young, “Downward Price Trend Probable, Due to Hoarding of Gold by Central Banks,”
The Annalist
(January 18, 1929): 96–97. Also see, “Our Reserve Bank Policy as Europe Thinks It Sees It,”
The Annalist
(September 2, 1927): 374–75.

21Seymour Harris,
Twenty Years of Federal Reserve Policy
(Cambridge, Mass.: Harvard University Press, 1933), vol. 1, 192ff., and Aldrich,
The Causes of the
Present Depression and Possible Remedies
(New York, 1933), pp. 20–21.

Part III

The Great Depression: 1929–1933

7

Prelude to Depression:

Mr. Hoover and Laissez-Faire

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch. Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses. Moreover, a drastic cut in the government budget—both in taxes and expenditures—will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment–consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects. Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a
dictum
hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the nineteenth century.

Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in
185

186

America’s Great Depression

America’s first great depression, 1819, when the federal government’s only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments which periodically permitted insolvent banks to continue in operation without paying their obligations.1 In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year—in what Dr. Benjamin M. Anderson has called “our last natural recovery to full employment.”

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. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.

Hoover’s role as founder of a revolutionary program of government planning to combat depression has been unjustly neglected by historians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at 1For an appreciation of the importance of this fact for American monetary history, see Vera C. Smith,
The Rationale of Central Banking
(London: P.S. King and Son, 1936).

Prelude to Depression: Mr. Hoover and Laissez-Faire
187

Hoover’s tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market.

To portray the interventionist efforts of the Hoover administration to cure the depression we may quote Hoover’s own sum-mary of his program, during his Presidential campaign in the fall of 1932

we 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. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.2

2From his acceptance speech on August 11, and his campaign speech at Des Moines on October 4. For full account of the Hoover speeches and anti-depression program, see William Starr Myers and Walter H. Newton,
The Hoover
Administration
(New York: Scholarly Press, 1936), part 1; William Starr Myers, ed.,
The State Papers of Herbert Hoover,
(New York. 1934), vols. 1 and 2. Also see Herbert Hoover,
Memoirs of Herbert Hoover
(New York: Macmillan, 1937), vol. 3.

188

America’s Great Depression

THE DEVELOPMENT OF HOOVER’S

INTERVENTIONISM: UNEMPLOYMENT

Hoover, of course, did not come upon his interventionist ideas suddenly. It is instructive to trace their development and the similar development in the country as a whole, if we are to understand clearly how Hoover could so easily, and with such nationwide support, reverse the policies that had ruled in all previous depressions.

Herbert Clark Hoover was very much the “forward-looking” politician. We have seen that Hoover pioneered in attempts to intimidate investment bankers in placing foreign loans. Characteristic of all Hoover’s interventions was the velvet glove on the mailed fist: i.e., the businessmen would be exhorted to adopt “voluntary” measures that the government desired, but implicit was the threat that if business did not “volunteer” properly, compulsory controls would soon follow.

When Hoover returned to the United States after the war and a long stay abroad, he came armed with a suggested “Reconstruction Program.” Such programs are familiar to the present generation, but they were new to the United States in that more innocent age. Like all such programs, it was heavy on government planning, which was envisaged as “voluntary” cooperative action under “central direction.”3 The government was supposed to correct “our marginal faults”—including undeveloped health and education, industrial “waste,” the failure to conserve resources, the nasty habit of resisting unionization, and seasonal unemployment. Featured in Hoover’s plan were increased inheritance taxes, public dams, and, significantly, government regulation of the stock market to eliminate “vicious speculation.” Here was an early display of Hoover’s hostility toward the stock market, a hostility that was to form one of the
leitmotifs
of his administration.4 Hoover, who to his credit 3See Joseph Dorfman,
The Economic Mind in American Civilization
(New York: Viking Press, 1959), vol. 14, p. 27.

4Hoover,
Memoirs,
vol. 2, p. 29. Hoover’s evasive rhetoric is typical: “I insisted that these improvements could be effected without government control, but the government should cooperate by research, intellectual leadership [sic]
,
and prohibitions upon the abuse of power.”

Prelude to Depression: Mr. Hoover and Laissez-Faire
189

has never pretended to be the stalwart of laissez-faire that most people now consider him, notes that some denounced his program as “radical”—as well they might have.

So “forward-looking” was Hoover and his program that Louis Brandeis, Herbert Croly of the
New Republic
, Colonel Edward M.

House, Franklin D. Roosevelt, and other prominent Democrats for a while boomed Hoover for the presidency.5

Hoover continued to expound interventionism in many areas during 1920. Most relevant to our concerns was the conference on labor–management relations that Hoover directed from 1919 to 1920, on appointment by President Wilson and in association with Secretary of Labor William B. Wilson, a former official of the United Mine Workers of America. The conference—which included

“forward-looking” industrialists like Julius Rosenwald, Oscar Straus, and Owen D. Young, labor leaders, and economists like Frank W.

Taussig—recommended wider collective bargaining, criticized

“company unions,” urged the abolition of child labor, and called for national old-age insurance, fewer working hours, “better housing,” health insurance, and government arbitration boards for labor disputes. These recommendations reflected Hoover’s views.6

Hoover was appointed Secretary of Commerce by President Harding in March, 1921, under pressure from the left wing of the Republican Party, led by William Allen White and Judge Nathan Miller of New York. (Hoover was one of the first of the modern breed of politician, who can find a home in either party.) We have seen that the government pursued a largely laissez-faire policy in the depression of 1920–1921, but this was not the doing of Herbert Hoover. On the contrary, he “set out to reconstruct 5Cf. Arthur M. Schlesinger, Jr.,
The Crisis of the Old Order, 1919–1933
(Boston: Houghton Mifflin, 1957), pp. 81ff.; Harris Gaylord Warren,
Herbert Hoover and
the Great Depression
(New York: Oxford University Press, 1959), pp. 24ff.

6Hoover records that the “extreme right” was hostile to these proposals—

and understandably so—and notably the Boston Chamber of Commerce. Also see Eugene Lyons,
Our Unknown Ex-President
(New York: Doubleday, 1948), pp. 213–14.

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America’s Great Depression

America.”7 He only accepted the appointment on the condition that he would be consulted on all economic policies of the federal government. He was determined to transform the Department of Commerce into “the economic interpreter to the American people (and they badly need one).”8 Hardly had Hoover assumed office when he began to organize an economic conference and a committee on unemployment. The committee established a branch in every state having substantial unemployment, along with sub-branches in local communities and Mayors’ Emergency Committees in 31 cities.9 The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.

As Hoover recalls:

We developed cooperation between the federal, state, and municipal governments to increase public works.