Hammering Hoover, re-inventing Roosevelt

In comparing the current economic crisis to the Great Depression, the attacks on poor old Herbert Hoover's legacy have begun again. That's a faulty revision of history, and President-elect Barack Obama's transition team would do well to know why.
Herbert Hoover listening to the radio.

Herbert Hoover listening to the radio. Department of Commerce

In a recent column, Nobel-prize laureate economist Paul Krugman referred to the states' governors, legally bound to balance their budgets in good times and in bad, as "50 Herbert Hoovers."

It's a rather slipshod historical metaphor, but a common one: Hoover caused the Great Depression, people say; Franklin Roosevelt rescued us from it.

The facts, however, are quite different. Hoover was by no means a bad president, and Roosevelt's reputation far exceeds his actual reach. (And Hoover's post-presidential record rivals Jimmy Carter's in terms of public service.)

Hoover and Roosevelt were well-intentioned, but they were products of their times. The economic problems of their day overwhelmed the common economic wisdom.

The Great Depression was caused by a perfect storm of events and bad policy: a growing bubble amid an economic boom — this time caused by automobiles and radios — (a bubble economy — sound familiar? Every recession is preceded by some kind of bubble); weakness in the farm sector caused by over-production; bad monetary and fiscal policy; bad trade policy; and, ultimately, a lack of any social safety net in which to catch the fallen.

But all of this wasn't Hoover's fault. The Hoover administration, like the latest Bush administration, did not push for any kind of regulation that might have curbed Wall Street's excesses. But neither did the administration of then-New York Gov. Franklin Roosevelt.

Hoover was, at one time, extraordinarily popular. A self-made millionaire from a career as a mining engineer, he had been an able administrator during and after World War I, helping to avert starvation in Europe by organizing food aid. Of course, the pressure the government put on farmers to produce more led to excess capacity following the war, which led to decades of low prices for farmers. That contributed to the Great Depression.

Hoover served the nation in the 1920s as secretary of commerce. In that time, he wrote a paper that suggested if the U.S. were to fall into another economic panic, as they were called then, the country should engage in a broad program of public works spending to get things moving again. (Sound familiar?)

Had Hoover stuck to his convictions, history might be different. Unfortunately for everyone, he didn't.

By 1928, people were urging Hoover to run for president, including his friend, Roosevelt. He handily beat Democrat Al Smith, and took office.

When the bottom dropped out of the economy in 1929 and 1930, Hoover sought to get his recovery plan moving, accelerating public works spending and creating the Reconstruction Finance Corporation, which helped bail out banks and other corporations. A record number of banks failed in the Depression, but it would have been much worse without the RFC.

There was no deposit insurance, so when a bank failed, you lost your money. The social safety net wasn't there, and savings disappeared.

The Federal Reserve, meanwhile, worried about loss of gold reserves to Europeans who were demanding gold for their dollars, jacked up interest rates to stem the gold tide. This was terrible timing, as though right now the Fed were to decide that what the current recession needed was high interest rates to curb inflation. Higher interest rates raise borrowing costs, further curbing spending and investment.

What Hoover didn't do was balance the budget. The federal budget showed a surplus in 1929 and 1930, but a deficit in 1931 and 1932. In fact, the deficit got smaller in 1933 under Roosevelt. As Roosevelt emerged as a Democrat front-runner, he began to campaign against "irresponsible Republican budget deficits." Hoover, hoping to get re-elected, pulled back on his spending plans.

The conventional wisdom was that a balanced budget was the right thing to do. Budget deficits were to be run only in times of emergency. War was an emergency; millions of people out of work and starving apparently was not. For the wealthy, poverty has always been a character flaw.


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Comments:

Posted Wed, Jan 14, 8:19 a.m. Inappropriate

I think you go a little easy on FDR in the name of balance. You cite the NRA and farm policy as the disasters they were, but state that authors like Shales are too hard on Roosevelt. Remember, Roosevelt's people got the idea for these policies from the "streamlined" and "modern" government of Benito Mussolini, a leader the president greatly admired. The NRA was little more than fascism, and like any command economy it greatly crippled the county in which it was adopted. Hoover, on the other hand, was a Gingrich-esque technocrat who believed that the government could make positive change by being more "inventive" in its interventions in the economy. Despite the way he's portrayed in popular history, he would have done better with a lighter touch. Coolidge may have done better still.

dbreneman

Posted Wed, Jan 14, 8:36 a.m. Inappropriate

Huh!

“Continued constructive policies promoting the economic recovery of the country must be the paramount duty of the Government. …Institutions and men may have resources and credit but unless they have confidence progress is halting and insecure.

”There are three definite directions in which action by the Government at once can contribute to strengthen further the forces of recovery by strengthening of confidence. They are the necessary foundations to any other action, and their accomplishment would at once promote employment and increase prices.

”The first of these directions of action is the continuing reduction of all Government expenditures, whether national, State, or local. The difficulties of the country demand undiminished efforts toward economy in government in every direction. ….”

Herbert Hoover, President of the United States
Annual Message to the Congress on the State of the Union.
December 6, 1932

Posted Wed, Jan 14, 9:52 a.m. Inappropriate

An interesting piece, as always from Terry Sell. Just one addition from my perspective: Hoover's greatest sin, compounded by FDR, which exacerbated the Depression, was dramatically raising tax rates while choking free trade with the Hawley-Smoot tariff act. That's what prolonged the Great Depression.

Posted Wed, Jan 14, 10:47 a.m. Inappropriate

Hoover was not Gingrich or even like him. I think you can argue that government should do less all you want, but history is not on your side. You need a strong private sector to keep the power of the state in check, and a strong state to keep the power of the market in check. Hoover's message to Congress, you'll note came after the election, after he'd already backed away from his earlier ideas. Finally, yes, raising taxes didn't help, nor did Smoot-Hawley. But trade was a smaller portion of our economy then than it is now.
TMS

T.M. Sell

Posted Wed, Jan 14, 12:39 p.m. Inappropriate

Excellent! A great overview of the issues and especially Hoover!

MORE! Ross Kane

Ross

Posted Wed, Jan 14, 2:47 p.m. Inappropriate

We are more likely to make exactly the opposite mistake Hoover made in restricting spending - the TARP, for one, is bailing out folks who definitely need to take a strong hit.

Locally, IMO, Gregoire, Nickels, and Sims are doing exactly the same thing, bailing out the crew that also gave the nation WAMU with the bully consensus SR 99 plan.

Posted Thu, Jan 15, 6:22 a.m. Inappropriate

Speaking to the California Republican Assembly in Oakland, California on October 5, 1935, Herbert Hoover claimed that he attempted to balance the budget, but was stymied in part by the Democratic Congress. He goes on to say that "had the Republican principles of balancing the budget been accepted in 1931 and 1932, the final stone in the foundation of permanent recovery would have been laid three years ago instead of deferred for years hence."
You are engaged in historical revisionism.

Posted Thu, Jan 15, 9:47 a.m. Inappropriate

Like Gingrich, Hoover was a "big idea" man, the type who was seen as a go-to guy who could think outside the box and come up with novel solutions to problems of government. If you've paid any attention to Gingrich since he left government, you've seen that that's exactly the role he's creating for himself. And while it may be true that history is on the side of ever-expanding, ever more intrusive and ever more authoritarian government, it's also on the side of entropy. The government bubble, like the housing bubble, will eventually collapse. Better to deflate it slowly and find a good equilibrium than wait for it to burst.

dbreneman

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