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June 10, 2007

Arthur Foulkes: The Great Depression muddled by myths

By Arthur Foulkes

Perhaps nothing in the economic history of the United States is more muddled with misunderstanding than the Great Depression.

One of the big myths associated with the 1930s economic crisis is that President Herbert Hoover, who was in office when the downturn started, was devoted to laissez faire, hands-off, economic policies.

A typical account of Hoover’s alleged approach to the economic collapse can be found in a current edition of a college-level American Government and Politics textbook. Its authors state:

“[Hoover] did not believe that the Depression was a symptom of a public problem that needed solving by the national government. Rather, Hoover called for charity and volunteerism to alleviate economic suffering. … There was no widespread presumption, as there is today, that government was responsible for the state of the economy …. ”

Another current government textbook puts it more bluntly, stating, “Herbert Hoover was the last great advocate of the laissez faire capitalism of the old order.”

Herbert Hoover became president in 1929. An engineer by training, he had previously served as Woodrow Wilson’s “food czar” during World War I and secretary of commerce under presidents Harding and Coolidge.

Even before the stock market crash of 1929, Hoover showed he did not oppose government intervention in the economy. One of his earliest moves as president – while the economy was still enjoying the “roaring ’20s” – was to set up the Federal Farm Board, which was designed to increase farm incomes through subsidized loans and, eventually, massive government purchases of food.

Hoover’s FFB signaled the first time federal money was used to attempt to manipulate farm prices.

Nor did Hoover keep his hands off the economy after the crash.

In 1930, Hoover did everything in his power to “persuade” business and industry leaders to keep wages high, despite falling demand and rising unemployment.

According to economist Murray Rothbard, if industrial leaders failed to “voluntarily” keep wages high, Hoover made it clear he would get Congress to force the issue. Industrial leaders complied and unemployment, predictably, rose steadily, reaching 25 percent of the work force by the end of Hoover’s presidency.

Also in 1930, Hoover, in a misguided effort to aid American agriculture and industry, signed the Smoot-Hawley Tariff, practically closing America’s borders to foreign trade. Because imports provide foreigners with the currency to pay for American products, the tariff had the unintended consequence of crippling American export industries (in addition to causing higher prices for American consumers). U.S. exports, which had totaled $5.5 billion in 1929, had fallen to $1.7 billion two years after Hoover signed the tariff bill.

Finally, also after the crash, Hoover greatly increased spending on public-works projects. He also subsidized the shipbuilding industry (which had been devastated by Smoot-Hawley’s effects on international trade) and supplied failing businesses with emergency loans through his newly established Reconstruction Finance Corp.

As economist Morgan Reynolds noted in 2003, Hoover was responsible for more public-works programs in his four years in office than had been undertaken in the previous 30 years. Indeed, Reynolds noted, under Hoover, federal expenditures increased 42 percent in a single year.

Until 1929, all previous economic depressions in American history had lasted a year or, at the most, two. In those earlier downturns, prices and wages were allowed to adjust naturally to changing conditions. There was a painful readjustment period, but it was always short term.

The crash of 1929, on the other hand, lasted a dozen years and became known as the Great Depression. Massive government intervention, starting with Hoover and accelerating under his successor, prevented the economy from recovering naturally as it had always done. Nine years after the crash of 1929, there were still more than 10 million unemployed Americans – nearly 19 percent of the labor force.

Henry Morgenthau, FDR’s treasury secretary and close friend, wrote in his diary in 1939, “[A]fter eight years of this administration we have just as much unemployment as when we started … and an enormous debt to boot.”

It is true that Hoover, after losing badly to Franklin D. Roosevelt in the 1932 election, began to sing a new (for him) tune. He became an outspoken critic of the New Deal, which, ironically, he had helped to usher in.

“We didn’t admit it at the time,” said Rexford Tugwell, a top official in FDR’s administration, “but practically the whole New Deal was extrapolated from programs that Hoover had started.”

Before he lost the 1932 election, Hoover honestly described his presidency when he told Republican presidential delegates:

“We might have done nothing [after the 1929 crash]. 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.”

In recent decades, professional historians have largely demolished the myth that Hoover was a laissez faire president. Yet, in the minds of many people – including some textbook authors – the myth dies hard.

The enduring strength of the myth that Hoover stood for laissez faire may be largely the result of the work of Hoover’s loyal supporters who stuck with him until the end of his life. These longtime Hoover loyalists, in the final years of their “chief’s” life, emphasized Hoover’s opposition to much of FDR’s New Deal and his faith in individualism and “volunteerism.”

Yet this was not how Hoover governed during his four years as president.

“To his credit,” Rothbard noted, “Hoover himself never claimed to be an exponent of laissez faire. Indeed, at every Republican convention until his death the old man would be trotted out to give a speech that no one ever bothered to listen to.

“In this speech Hoover would insist that he himself was the father of numerous measures the New Deal got credit for, and he would proudly go through the list. But everyone, friend and foe alike, was too busy making myths to hear him.”

Arthur Foulkes is a native of Terre Haute and a longtime resident. The Tribune-Star reporter writes a weekly column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@

tribstar.com.

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