Poor Hoover!

Viewed by today´s liberals/progressives, in other words the ‘Krugman crowd’, as an “inglorious bastard”, the man who embraced ‘laissez-faire’ and stood aside while the GD raged on.

I say this after taking up Lars’ suggestion and reading Steven Horwitz´s “Herbert Hoover – Father of the New Deal”.

From the abstract:

Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years.

He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt’s advisers knew that Hoover had started the New Deal. One of them wrote, “When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.”

So why is FDR ‘idolized’ and Hoover ‘demonized’? After all, Both Hoover´s policies and FDR´s New Deal did not get the economy out of the depression and quite a few argue convincingly they prolonged it.

Enter monetary policy. But first I think it´s instructive to quote from a Krugman post on Hoover written at about the same time as Horwitz’s article:

Brad DeLong leads us to Herbert Hoover opposing what was, in effect, a mild fiscal stimulus in the form of early payment of veterans’ bonuses:

“It cannot be borrowed without impairment of the credit of the National Government and thus destroy that confidence upon which our whole system depends. It is unthinkable that the Government of the United States should resort to the printing press and the issuance of fiat currency as provided in the bill which passed the House at the last session of Congress under the leadership of the Democratic vice presidential candidate. Such an act of moral bankruptcy would depreciate and might ultimately destroy the value of every dollar in the United States.”

This should (but won’t) dispel the myth that Hoover was some kind of proto-Keynesian. But look, also, at how closely Hoover’s line of argument follows that of Very Serious People today.

Note, however, that Hoover is talking about monetary policy, not fiscal policy, and much like Keynes, was not in favor of debasing the currency. In The Economic Consequences of the Peace Keynes writes:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Where FDR ‘innovated’ was in using monetary policy and not being afraid, actually ‘relishing’, the debasement of the currency, devaluing the dollar and establishing a price level target.

Things moved and moved fast. In just four months industrial production surged by more than 50% and wholesale prices, which had dropped by 37% in the four years since mid-1929, went up by 45% in the next four.

Quite likely, if it weren´t for the interventionist Hoover-FDR policies the Great Depression of the 1930s would have been a different ‘animal’ altogether!

4 thoughts on “Poor Hoover!

  1. I recently calculated the the cyclically adjusted general government budget deficits and their changes from E. Cary Brown’s “Fiscal Policy in the “Thirties: A Reappraisal” (American Economic Review, Vol. 46, No. 5, December 1956, pp. 857–879). This reflects state and local budgets as well federal, but as you might imagine most of the impact comes from the federal budget . Note that I’ve reversed the signs of the changes so that positive corresponds to fiscal stimulus and negative corresponds to fiscal consolidation (everything is in percent of potential GDP):

    Year Balance Change
    1929 -0.804 ——-
    1930 -1.364 0.56
    1931 -3.311 1.95
    1932 -0.854 -2.46
    1933 1.005 -1.86
    1934 0.172 0.83
    1935 -0.056 0.23
    1936 -1.078 1.02
    1937 1.828 -2.91
    1938 0.608 1.22
    1939 -0.147 0.76

    As you can see the largest cylically adjusted deficit as well as the largest increase in the deficit took place in calendar year 1931.The largest deficit under FDR was in 1936 and it is less than one third as large. One has to be careful with 1929 and 1933 since the fiscal years ran to the middle of the year and calendar 1929 was half Coolidge’s doing and 1933 was split between Hoover and FDR. But it’s clear that the fiscal stance was much tighter under FDR than Hoover with probably the only cylically adjusted fiscal year deficit being run in FY1936 and the only balanced budget under Hoover by this standard being in FY1933.

    Another interesting fact is that although personal income, capital gains and corporate taxes were increased in 1936, the increases were very modest (notice that the cylically adjusted deficit actually increased). The increase in personal taxes only affected those in the top 2%, and was trivial compared to the tax increase of 1932 which approximately tripled the effective tax rate of those at the 99th percentile.

    • Thanks Mark. And 1936 was so “expansionary” because that´s when the veteran Bonus was paid out (after some resistance from FDR). But being an election year and all…

  2. Virtually every respected economist warned FDR against playing with inflation (debasement). There were some prairie college crackpots in favor of it, but no one respectable. He went ahead and suspended convertibility and began to raise the price of gold on a daily basis by arbitrary increments. The deflation ended immediately. Unfortunately, he was subsequently persuaded to stop tinkering and to repeg to gold at $35, which was a contributor to the later relapse. Orthodox economics saw what he had done and said “pay no attention, it has no general applicability”.

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