Herbert Hoover and Central Planning

Got into a discussion today at dinner about the Great Depression, what caused it, and whether or not FDR's policies prolonged it. It's going to take me a couple posts to sort through all my thoughts on this topic, but for starters I'm going to cover some of the basics right here today.

Did Hoover really do nothing? Most people believe that Hoover stood by and did nothing while the economy collapsed, and that it was only FDR's vigorous intervention in the economy that "saved the day" for "capitalism." In fact, nothing could be further from the truth.

Hebert Hoover, U.S. President 1929-1933

In the first place, it isn't true that Hoover stood by and "did nothing." In fact, Hoover did more than any peacetime president in American history (up to that point) had done. Rexford Tugwell, an important figure in FDR's New Deal programs and someone we met on my post about the $25 Million Constitution, is on record as stating: "We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started."

Secondly, it was Hoover's constant meddling with the economy that managed to turn the mild recession of 1929 into the Great Depression of the 1930s. The economic picture may have been bad in 1929 and 1930, but it wasn't until 1931, after a year of government intervention, that the situation truly became critical.

• Messing with employment: Within a month following the stock market crash, Hoover summoned key business leaders to the White House. He implored them to refrain from cutting wages, arguing that high wages were the way out of the economic downturn since they gave workers the means to purchase goods.
  
  Depressions, of course, occur for one and only one reason: a contraction in the amount of money available to the economy; hence, the only way out of a depression is to let prices (and wages) fall. Wages are, after all, a cost of doing business. By demanding high wages - at a time when prices were (naturally) falling - Hoover was making it more difficult for businesses to hire people. Nevertheless, big business honored Hoover's wishes, and the result was predictable: mass unemployment.
  
  
  
  Hoover's Policies Created Record Unemployment
  
  
  High wages are a reflection of prosperity, not the cause of it. If high wages alone could produce prosperity, we could eliminate poverty by simply having the government mandate a $100-per-hour minimum wage. The sheer insanity of this, to say nothing of the mass unemployment this would cause, should be apparent to anyone, yet this is precisely the policy that Hoover (and his successor, FDR) followed.
  

• Messing with agriculture: American agriculture had suffered from a chronic surplus problem throughout most of the 1920s. During WWI, U.S. agricultural output had expanded dramatically. Once the war was over, though, the nation found that it had far more farmers than it (or even the world) actually needed. The resulting surpluses (naturally) depressed the prices of almost all agricultural goods. Yet rather than allow supply-and-demand to work its natural course, American farmers had grown dependent on government assistance (in one form or another) to help prop up agricultural prices.
  
  
  
  Canadian and Argentinian farmers stole global
  market share from the U.S., thanks to Hoover
  
  
  Hoover continued this policy by establishing the Federal Farm Board (FFB) in 1929 to make loans to farmers so they could keep their crops (especially wheat and cotton) off the market until prices rose. Yet whenever prices actually did rise, farmers went ahead and produced even more crop, making the surplus even worse for the following year. Eventually the Federal Farm Board decided to authorize, through its Grain Stablization Corporation, massive purchases of U.S. wheat well above world prices. Farmers therefore sold their wheat to the Grain Stablization Corporation, rather than exporting it. Hoover was sure that by keeping American wheat off the world market, a global shortage would ensue and soon the world would be begging for more American wheat. Instead, Canadian and Argentinian producers increased their output and stole what was left of America's share of the world market.
  
  
• Messing with taxes: In June 1930, Hoover signed the Smoot-Hawley Tariff into law. Originally intended to provide tariff protection to American agriculture, Smoot-Hawley ended up providing "protection" for virtually every sector of the economy by raising tariffs an average of 59% on over 25,000 imported items. The impact on American exporters was predictable. The Italian government, for instance, responded by doubling its tariffs on American cars, causing American auto sales in Italy to plummet by 90%. Spain too raised tariffs on American cars, to the point where almost no American cars could be sold there. France simply closed its markets altogether to virtually all American products.
  
  
  
  
  Andrew Mellon, Tax Tyrant
  
  
  There were other (insane) tax increases as well. Andrew Mellon, who served as Secretary of the Treasury under Hoover, helped push through the disasterous Revenue Act of 1932. It was the largest peacetime tax increase in U.S. history up to that point. Income tax rates were increased dramatically and surtaxes on the highest incomes rose from 23% to 63%. Mellon also introduced new federal taxes on: corporations, estates, gifts, cars, tires, gasoline, toiletries, electricity, luxury items, bank checks and on telephone, telegraph and radio messages.
  
  Messing with spending: Hoover spent more on public works projects during his four years in office, then had been spent in the previous thirty. He subsidized the shipbuilding industry at a time when demand for shipping services was falling due to a shrinkage in international trade caused by Smoot-Hawley. Hoover's Reconstruction Finance Corporation (RFC) supplied failing businesses, usually railroads and banks, with emergency low-interest loans. Most of the businesses Hoover attempted to save wound up going bankrupt anyway, or were burdened throughout the 1930s with crushing loads of debt.
  
  Hoover is on record as stating in 1932 that "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." The result, of course, was an economic catastrophe of collossal proportions, one which FDR would spend the next 12 years perpetuating and fine-tuning.
  

More info on these topics can be found in Thomas E. Woods, Jr.'s excellent book, The Politically Incorrect Guide to American History. In a future post, I'll go over how FDR finished the work that Hoover started, by unneccessarily prolonging the Depression. I'll also cover some of the basics of recessions, depressions and the business cycle.