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border immigration patrol (thus “relieving unemployment” by preventing Mexicans from coming here to improve their condition), appropriations for naval ships, and requiring all new naval work to be done in navy yards and arsenals instead of on private contract.

Meanwhile, the states moved in to compel cartellization and virtual socialization of the crude oil industry. The oil-producing states enacted laws to enable governmental commissions to fix the maximum amount of oil produced, and this system is basically still in effect. The state laws were enacted under the public guise of

“conservation,” which is a pat excuse for any compulsory monopoly or cartel in a natural resource. In 1931, new oil discoveries in East Texas drove the price of crude down from one dollar a barrel to 22 cents a barrel, and cartelists and conservationists set up a hue and cry. The lead was taken by Oklahoma's Governor “Alfalfa Bill” Murray, who ordered a general shutdown of the crude oil industry until the price of oil should rise to the “minimum fair price” of one dollar a barrel. When some producers proved recalcitrant, Murray sent the Oklahoma National Guard into the oil fields to enforce his decree with bayonets. Soon, Texas followed suit, and the leading oil states of California, Texas, Kansas, and Oklahoma passed “conservation” and proration laws to fix production ceilings in a more orderly manner. Two emergency sessions of the Texas legislature were called to broaden the oil-regulating powers of the Texas Railroad Commission, after it had suffered unfavorable court injunctions.

The oil states also organized an Oil States Advisory Committee to decide on quotas—soon to become an interstate compact—and a “Voluntary Committee” of the Federal Oil Conservation Board aided in the effort. Some well owners found that they could evade the troops and decrees and smuggle “hot oil” out of the state, but this “loophole” of freedom was finally closed by the New Deal. To bolster the oil cartel, the Federal budget of 1932 included a tariff on imported crude oil and on petroleum products. This made the domestic cartel more effective, but it also reduced American exports of petroleum.42 It is, of course, curious to find a restriction 42See George W. Stocking, “Stabilization of the Oil Industry: Its Economic and Legal Aspects,”
American Economic Review, Papers and Proceedings
(May, 1933): 59–70.

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on
imports
imposed as part of a domestic resource
conservation
program, but we find the same phenomena today. If conservation were really the goal, then surely imports would have been encouraged to ease demands on domestic oil.

Let it not be thought that Hoover was idle in this movement.

Even before the depression, he was considering coercive restrictions on oil production. The President canceled permits to drill for oil in, large parts of the public domain, and he and Secretary of Interior Ray Lyman Wilbur were in large part responsible for the new state “conservation” laws. Hoover and Wilbur also pressured private oil operators near the public domain into agreements to restrict oil production.43

As 1931 drew to a close and another Congressional session drew near, the country and indeed the world were in the midst of an authentic crisis atmosphere—a crisis of policy and of ideology.

The depression, so long in effect, was now rapidly growing worse, in America and throughout the world. The stage was set for the

“Hoover New Deal” of 1932.

43If the coal industry was not as successful as the oil in becoming cartellized, it was not for lack of trying. C.E. Bockus, president of the National Coal Association, wrote in an article, “The Menace of Overproduction,” of the need of the coal industry

to secure, by cooperative action, the continuous adjustment of the production of bituminous coal to the existing demand for it, thereby discouraging wasteful methods of production and consumption. . . . The European method of meeting this situation is through the establishment of cartels.

Quoted in Ralph J. Watkins,
A Planned Economy Through Coordinated Control of
Basic Industries
(mimeographed manuscript, submitted to American Philanthropic Association, October, 1931), pp. 54ff.

Hoover also reduced production in other fields by adding over two million acres to the virtually useless national forests during his regime, as well as increasing the area of the totally useless national parks and monuments by forty percent.

If Congress had not balked, he would have permanently sequestered much more usable land. See Harris Gaylord Warren,
Herbert Hoover and the Great Depression
(New York: Oxford University Press, 1959), pp. 64, 77–80.

11

The Hoover New Deal of 1932

President Hoover came to the legislative session of 1932 in an atmosphere of crisis, ready for drastic measures. In his annual message to Congress, on December 8, 1931, Hoover first reviewed his own accomplishments of the past two years: Many undertakings have been organized and forwarded during the past year to meet the new and changing emergencies which have constantly confronted us . . . to cushion the violence of liquidation in industry and commerce, thus giving time for orderly readjustment of costs, inventories, and credits without panic and widespread bankruptcies.

Measures such as Federal and state and local public works, work-sharing, maintaining wage rates (“a large majority have maintained wages at high levels” as before), curtailment of immigration, and the National Credit Corporation, Hoover declared, have served these purposes and fostered recovery. Now, Hoover urged more drastic action, and he presented the following program: (1) Establish a Reconstruction Finance Corporation, which would use Treasury funds to lend to banks, industries, agricultural credit agencies, and local governments; (2) Broaden the eligibility requirement for discounting at the Fed;

(3) Create a Home Loan Bank discount system to revive construction and employment measures which had been
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warmly endorsed by a National Housing Conference recently convened by Hoover for that purpose;

(4) Expand government aid to Federal Land Banks; (5) Set up a Public Works Administration to coordinate and expand Federal public works;

(6) Legalize Hoover’s order restricting immigration; (7) Do something to weaken “destructive competition” (i.e., competition) in natural resource use;

(8) Grant direct loans of $300 million to States for relief; (9) Reform the bankruptcy laws (i.e., weaken protection for the creditor).

Hoover also displayed anxiety to “protect railroads from unregulated competition,” and to bolster the bankrupt railroad lines. In addition, he called for sharing-the-work programs to save several millions from unemployment.

THE TAX INCREASE

With a $2 billion deficit during annual year 1931, Hoover felt that he had to do something in the next year to combat it. Deficit spending is indeed an evil, but a balanced budget is not necessarily a good, particularly when the “balance” is obtained by increasing revenue and expenditures. If he wanted to balance the budget, Hoover had two choices open to him: to reduce expenditures, and thereby relieve the economy of some of the aggravated burden of government, or to increase that burden further by raising taxes. He chose the latter course. In his swan song as Secretary of Treasury, Andrew Mellon advocated, in December, 1931, drastic increases of taxes, including personal income taxes, estate taxes, sales taxes, and postal rates. Obedient to the lines charted by Mellon and Hoover, Congress passed, in the Revenue Act of 1932, one of the greatest increases in taxation ever enacted in the United States in peacetime. The range of tax increases was enormous. Many wartime excise taxes were revived, sales taxes were imposed on gasoline, tires, autos, electric energy, malt, toiletries, furs, jewelry, and other
The Hoover New Deal of 1932

287

articles; admission and stock transfer taxes were increased; new taxes were levied on bank checks, bond transfers, telephone, tele-graph, and radio messages; and the personal income tax was raised drastically as follows: the normal rate was increased from a range of 12 percent–5 percent, to 4 percent–8 percent; personal exemp-tions were sharply reduced, and an earned credit of 25 percent eliminated; and surtaxes were raised enormously, from a maximum of 25 percent to 63 percent on the highest incomes. Furthermore, the corporate income tax was increased from 12 percent to l3: percent, and an exemption for small corporations eliminated; the estate tax was doubled, and the exemption floor halved; and the gift tax, which had been eliminated, was restored, and graduated up to 33a percent.1 Hoover also tried his best to impose on the public a manufacturers’ sales tax, but this was successfully opposed by the manufacturers. We might mention here that for Hoover the great increase in the estate tax was moral
in itself
, in addition to its alleged usefulness as a fiscal measure. The estate tax, he declared, is “one of the most economically and socially desirable—or even necessary of all taxes.” He hinted darkly of the “evils of inherited economic power,” of “cunning lawyers,” and “obnoxious” play-boys: there was no hint that he realized that a tax on inherited wealth is a tax on the property of the able or the descendants of the able, who must maintain that ability in order to preserve their fortunes; there was not the slightest understanding that a pure tax on capital such as the estate tax was the worst possible tax from the point of view of getting rid of the depression.

The raising of postal rates burdened the public further and helped swell the revenues of a compulsory governmental monopoly. The letter rates were raised from 2¢ to 3¢ despite the fact that the Post Office’s own accounting system already showed a large profit on first class mail. Postage on publishers’ second class mail was raised by about one-third, and parcel post rates on small parcels were increased by 25 percent (though rates on large parcels 1See Sidney Ratner,
American Taxation
(New York: W.W. Norton, 1942), pp.

447–49.

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were lowered slightly).2 One of the most cogent critiques of Hoover’s astoundingly wrong-headed program was delivered by the St. Louis Chamber of Commerce. Alarmed by the incessant call for higher taxes, the Chamber declared:

When governments seek to maintain the high levels of taxation they reached in good times in these days of seriously impaired income, the impending specter of higher taxes constitutes one of the chief deterrents of business recovery.

The taxpayers, it insisted, should obtain a reduction of both taxes and government expenditures.3 And the
Atlanta Constitution
called the 1932 tax act “the most vicious tax bill . . . ever saddled on the country in time of peace.”4

EXPENDITURES VERSUS ECONOMY

Despite the drastic increase in tax rates, total Federal revenue for 1932 declined because of the deepened depression—itself partly caused by the increase in tax rates. Total Federal receipts, excluding government enterprises, declined from $2.2 billion in 1931 to $1.9 billion in 1932; including government enterprises, Federal receipts fell from $3.4 billion to $3 billion. Total government receipts fell from $12.4 billion to $11.5 billion including government enterprises, from $10.3 billion to $9.5 billion excluding them. As a result, the huge Federal deficit continued despite a drop 2See Jane Kennedy, “Development of Postal Rates: 1845–1955,”
Land
Economics
(May, 1957): 93–112; and idem, “Structure and Policy in Postal Rates,”
Journal of Political Economy
(June, 1957): 185–208. Hoover also deliberately used a system of airmail subsidies effectively to bring the air transport industry under government dictation. To Hoover, this was a device for “orderly development” of the airline industry. See Harris Gaylord Warren,
Herbert Hoover and the Great
Depression
(New York: Oxford University Press, 1959), p. 70.

3
Congressional Record
75 (January 12, 1932), p. 1763. Also see Russell C.

Leffingwell, “Causes of Depression,”
Proceedings of the Academy of Political Science
(June, 1931): 1.

4Randolph Paul,
Taxation in the United States
(Boston: Little, Brown, 1954), p. 162.

The Hoover New Deal of 1932

289

in government expenditures in 1932: Federal expenditures falling from $4.4 billion to $3.4 billion (from $5.5 billion to $4.4 billion if we include government enterprises), and aggregate government expenditures falling from $13.3 billion to $11.4 billion (from $15.2

billion to $13.2 billion if we include government enterprises). Of the $1.7 billion in total government deficit, the bulk of it—$1.4

billion—was in the Federal government account.

The decline of $1 billion in Federal expenditures over the year consisted of an $800 million decline in transfer payments (veterans’ loans), and a $200 million drop in grants to state and local governments. The drop in state and local government expenditures of $900 million in 1932 consisted largely of an $800 million decline in new construction. The state and local governments, which differ from the Federal government in not being able to print new money or new bank deposits by selling bonds to a controlled banking system, found by 1932 that their financial condition was too grave to permit continued public works on such a large scale. The state and local governments were therefore forced to cut back their expenditures to near the level of their dwindling receipts.

What did all this mean for the fiscal burden of government on the economy? While the absolute amount of Federal depredations fell from $5.5 to $4.4 billion in 1932, and state and local burdens fell from $9.7 to $8.8 billion, GNP, and gross private product, declined far more drastically. GNP fell from $76.3 billion in 1931

to $58.5 billion in 1932, while GPP fell from $70.9 billion to $53.3

billion. Net private product fell from $62.7 to $45.7 billion.