WEBVTT NOTE Herbert Hoover and the Great Depression 1 00:00:00.000 --> 00:00:07.000 Well, today we're going to talk about the Great Depression and President Herbert Hoover's response to it. 2 00:00:07.000 --> 00:00:16.000 There's a lot of misunderstanding about this and a great many misconceptions, and I'd like to address them in the brief time we have today. 3 00:00:16.000 --> 00:00:37.000 So first, the Great Depression itself. American history textbooks take for granted that the Great Depression was caused by some inherent flaw in the free market and that only wise government management of the economy can steer us clear of similar economic catastrophes in the future. 4 00:00:37.000 --> 00:00:43.000 This is the mainstream view held by everyone from Marxists to run-of-the-mill conservatives. 5 00:00:43.000 --> 00:00:55.000 The market economy, whatever its benefits, is said to be inherently unstable and susceptible to devastating downturns unless properly managed by central planners of one stripe or another. 6 00:00:55.000 --> 00:01:08.000 The business cycle, the boom and bust of prosperity and collapse, is said to be an unavoidable feature of capitalism that can be mitigated by government action but never entirely eliminated. 7 00:01:08.000 --> 00:01:16.000 One major school of economic thought, the so-called Austrian School, named for the country of origin of its principal founders, 8 00:01:16.000 --> 00:01:22.000 rejects this casual mainstream assumption and places the blame for boom and bust elsewhere. 9 00:01:22.000 --> 00:01:27.000 Significantly, it was economists of this school practically alone among economists in the 1920s, 10 00:01:27.000 --> 00:01:34.000 the rest of whom insisted to their later embarrassment that an age of permanent prosperity had arrived. 11 00:01:34.000 --> 00:01:37.000 It was these economists who predicted the Great Depression. 12 00:01:37.000 --> 00:01:45.000 and Depression. And it was his elaborations on this theory that won F. A. Hayek the Nobel Prize in Economics in 1974. 13 00:01:45.000 --> 00:01:54.000 Hayek's Nobel sparked renewed interest in the Austrian theory of the business cycle, as did the bus that followed the dot-com boom of the 1990s, 14 00:01:54.000 --> 00:01:57.000 which was a textbook example of the Austrian theory in action. 15 00:01:57.000 --> 00:02:04.000 There's an article in the Quarterly Journal of Austrian Economics that you can find at mises.org when you go under publications 16 00:02:04.000 --> 00:02:12.000 written by Gene Callahan and Roger Garrison that makes this argument about the dot-com boom and bust. 17 00:02:12.000 --> 00:02:15.500 But the Austrian theory can also shed light on the Great Depression, 18 00:02:15.500 --> 00:02:23.000 specifically one of the most catastrophic and least understood episodes in American economic history. 19 00:02:23.000 --> 00:02:29.000 Now in his classic little essay on economic depressions, their cause and cure, 20 00:02:29.000 --> 00:02:38.000 Murray Rothbard suggested that any theory claiming to account for the business cycle has to be able to reckon with two empirical facts. 21 00:02:38.000 --> 00:02:50.000 First, it has to be able to explain why all of a sudden we should discover that entrepreneurs throughout the economy have made disastrous forecasting errors. 22 00:02:50.000 --> 00:02:57.000 Anticipating consumer demand for some product or service is the quintessential entrepreneurial function. 23 00:02:57.000 --> 00:03:08.000 How should entrepreneurs who have achieved their position, thanks to their previous success at anticipating consumer demand, now commit such egregious errors? 24 00:03:08.000 --> 00:03:15.000 Not all markets are depressed during the bust period, to be sure. Some are flat, some are even counter-cyclical. 25 00:03:15.000 --> 00:03:25.000 But there is a dramatic imbalance toward losses rather than profits. What can account for this sudden cluster of entrepreneurial error? 26 00:03:25.000 --> 00:03:40.000 Second, the theory must explain why economic depressions tend to be considerably worse in so-called producer goods industries like construction, machine tools and raw materials, and relatively mild in consumer goods industries. 27 00:03:40.000 --> 00:03:52.000 American history texts like to claim that so-called underconsumption caused the Great Depression. Americans supposedly could not afford to buy the goods the economy was producing. 28 00:03:52.000 --> 00:04:01.400 Now, if that were true, the downturn should have been worse in consumer goods industries like toothbrushes, hats and magazines than in producer goods industries, 29 00:04:01.400 --> 00:04:06.500 but the Depression was actually at its mildest in consumer goods industries. 30 00:04:06.500 --> 00:04:13.300 Underconsumption theories are unable to account for this consistently observed fact about depressions. 31 00:04:13.300 --> 00:04:19.100 The Austrian explanation, which exonerates capitalism of blame for recessions and depressions, 32 00:04:19.100 --> 00:04:23.100 begins by reminding us of the role that interest rates play in the economy. 33 00:04:23.100 --> 00:04:27.100 Interest rates coordinate production across time. 34 00:04:27.100 --> 00:04:31.100 As people consume less and save more, interest rates come down. 35 00:04:31.100 --> 00:04:35.100 That stands to reason. Thanks to people's additional saving, 36 00:04:35.100 --> 00:04:39.100 the banks now have more funds available to lend and therefore the price of borrowing, 37 00:04:39.100 --> 00:04:43.100 namely the interest rate, comes down. On the other hand, 38 00:04:43.100 --> 00:04:47.100 if people save relatively little, the interest rate remains high, 39 00:04:47.100 --> 00:04:53.100 since in this case the banks have relatively little to lend and the price of borrowing remains high. 40 00:04:53.100 --> 00:04:59.100 Businesses respond to these lower interest rates by taking the opportunity to embark on investment projects 41 00:04:59.100 --> 00:05:07.100 such as building new physical plant or acquiring additional machinery that will increase their productive capacity in the future. 42 00:05:07.100 --> 00:05:14.100 Now notice, when people save more, they reveal a relative decline in their desire to consume in the present. 43 00:05:14.100 --> 00:05:21.900 That's when it makes the most sense for businesses to carry out time-consuming investment projects with an eye to future production. 44 00:05:21.900 --> 00:05:26.800 If, on the other hand, people possess an intense desire to consume in the present, 45 00:05:26.800 --> 00:05:40.000 their relatively low amount of saving and the high interest rates that result convey to business that now would not be a good time to shift resources toward projects intended to increase future production. 46 00:05:40.000 --> 00:05:43.700 So the interest rate ensures a compatible mix of market forces. 47 00:05:43.700 --> 00:05:47.600 If people want to consume now, businesses respond accordingly. 48 00:05:47.600 --> 00:05:54.700 If people want to consume in the future, businesses allocate resources to satisfy that desire as well. 49 00:05:54.700 --> 00:06:03.400 But the interest rate can perform this coordinating function only if it is allowed to fluctuate freely in response to changing conditions. 50 00:06:03.400 --> 00:06:08.600 When the central bank, in the American case the Federal Reserve system, manipulates the interest rate, 51 00:06:08.600 --> 00:06:14.480 It introduces systemic problems of discoordination and miscalculation. 52 00:06:14.480 --> 00:06:19.800 Although it cannot do so directly, the Federal Reserve system has various means at its disposal 53 00:06:19.800 --> 00:06:22.320 to bring about lower interest rates. 54 00:06:22.320 --> 00:06:27.080 When it does so, interest rates are lower not because people have saved more and indicated 55 00:06:27.080 --> 00:06:31.760 a desire to consume less in the present, but instead because they have been forced down 56 00:06:31.760 --> 00:06:32.760 artificially. 57 00:06:32.760 --> 00:06:38.560 They no longer reflect the true state of consumer demand and economic conditions in general. 58 00:06:38.560 --> 00:06:41.560 These artificially low interest rates mislead investors. 59 00:06:41.560 --> 00:06:50.560 The low rates make investment decisions suddenly appear profitable that under normal conditions would be correctly assessed as unprofitable. 60 00:06:50.560 --> 00:06:56.560 As a result, irrational investment decisions are made and investment activity is distorted. 61 00:06:56.560 --> 00:07:04.560 The Federal Reserve's policy of cheap credit misleads businesses into thinking that now is a good time to invest in long-term projects 62 00:07:04.560 --> 00:07:11.060 when in fact the public has given no indication of any intention to postpone present consumption 63 00:07:11.060 --> 00:07:16.060 and free up resources that investors can devote to long-term projects. 64 00:07:16.060 --> 00:07:22.060 The central bank's lowering of the interest rate therefore creates a mismatch of market forces. 65 00:07:22.060 --> 00:07:26.060 Long-term investments that will bear fruit only in the distant future 66 00:07:26.060 --> 00:07:32.560 are encouraged at a time when the public has shown no let-up in its desire to consume in the present. 67 00:07:32.560 --> 00:07:35.560 Resources are therefore being misallocated. 68 00:07:35.560 --> 00:07:43.560 In the short run, the result of the central bank's lowering of interest rates is the apparent prosperity of the boom period. 69 00:07:43.560 --> 00:07:50.560 New construction is everywhere, businesses are expanding their capacity, and people are enjoying a high standard of living. 70 00:07:50.560 --> 00:07:54.560 But the economy is on a sugar high and will inevitably come down. 71 00:07:54.560 --> 00:08:01.560 Since the public has not saved as much as the artificially low interest rate makes entrepreneurs think they have saved, 72 00:08:01.560 --> 00:08:08.560 have been saved. Insufficient resources have been freed up to make all of these new investment projects sustainable. 73 00:08:08.560 --> 00:08:19.560 The complementary goods that businesses need in order to complete these projects turn out to be scarcer and thus more expensive than investors anticipated. 74 00:08:19.560 --> 00:08:28.560 Some of these investments will prove to be unsustainable and will have to be abandoned, with the resources devoted to them having been partially or completely squandered. 75 00:08:28.560 --> 00:08:37.560 The Federal Reserve could simply pump still more credit into the economy to keep the boom going, and indeed it usually does just that. 76 00:08:37.560 --> 00:08:40.560 But at some point, it has to put on the brakes. 77 00:08:40.560 --> 00:08:46.560 The more it inflates, the greater the mismatch between consumer preferences and productive capacity. 78 00:08:46.560 --> 00:08:52.560 As this becomes more apparent, pressure builds for a liquidation of the malinvestments. 79 00:08:52.560 --> 00:09:05.560 If the Fed ignores this pressure and continues inflating the money supply indefinitely, it risks hyperinflation, a galloping inflation so severe as to destroy the currency unit altogether. 80 00:09:05.560 --> 00:09:16.560 The recession or depression is the necessary, if unfortunate, correction process by which the malinvestments of the boom period, having at last been brought to light, are liquidated. 81 00:09:16.560 --> 00:09:25.560 The Central Bank's cheap credit policy encouraged the initiation of countless investment projects that could not be sustained in the long run. 82 00:09:25.560 --> 00:09:39.560 The diversion of resources into unsustainable investments that do not conform with consumer desires and resource availability swiftly ceases as businesses fail and investment projects are abandoned. 83 00:09:39.560 --> 00:09:45.560 We now see how the Austrian theory answers our two original questions. 84 00:09:45.560 --> 00:09:57.560 The cluster of entrepreneurial error occurs because economic actors are misled by the interest rate, an economic indicator that enters into the calculations of all serious entrepreneurs. 85 00:09:57.560 --> 00:10:11.560 And the downturn is heavier in producer goods industries rather than consumer goods industries, because it is that sector in which the artificially low interest rates disproportionately attract investment. 86 00:10:11.560 --> 00:10:17.400 Although this is not the version of the story that Americans get in the standard telling, 87 00:10:17.400 --> 00:10:22.440 these are precisely the events that led up to and caused the Great Depression. 88 00:10:22.440 --> 00:10:28.080 Contrary to popular belief, the 1920s saw a very substantial inflation of the money supply, 89 00:10:28.080 --> 00:10:32.640 which in classic Austrian fashion sowed the seeds of the inevitable collapse. 90 00:10:32.640 --> 00:10:37.120 The extent of that inflation of the money supply was obscured by the relatively stable 91 00:10:37.120 --> 00:10:47.120 This was the stable price level of the 1920s, but that stable price level was the result of increasing productivity, which offset the inflation of the money supply. 92 00:10:47.120 --> 00:11:01.120 Moreover, just as the Austrian theory would lead us to expect, the economic downturn disproportionately hit producer goods industries and not the consumer goods industries that under consumptionist theories would lead us to expect. 93 00:11:01.120 --> 00:11:05.400 The business cycle theory explains what causes the initial downturn, 94 00:11:05.400 --> 00:11:10.880 but just how long and severe the depression will be depends on the government's response. 95 00:11:10.880 --> 00:11:17.640 If out of a misplaced humanitarianism, or just plain ignorance, the government hinders the liquidation process 96 00:11:17.640 --> 00:11:23.840 by bailing out failing businesses, propping up wages, or artificially stimulating consumption, 97 00:11:23.840 --> 00:11:27.720 the recovery will be much slower and more painful. 98 00:11:27.720 --> 00:11:31.880 For example, government-sponsored emergency loans merely prop up the unsound investment 99 00:11:31.880 --> 00:11:36.600 projects undertaken during the boom and the misdirected resources being squandered on 100 00:11:36.600 --> 00:11:40.400 them and thus only intensify the problem. 101 00:11:40.400 --> 00:11:45.480 Wages and prices must be allowed to fluctuate freely so that labor and capital may be moved 102 00:11:45.480 --> 00:11:51.800 rapidly into lines that make sense in terms of prevailing economic conditions. 103 00:11:51.800 --> 00:11:56.680 The initial downturn of the Great Depression occurred in late 1929, of course, but conditions 104 00:11:56.680 --> 00:12:02.920 These did not reach truly calamitous proportions until 1931, which economist Benjamin Anderson 105 00:12:02.920 --> 00:12:07.520 called the Tragic Year. 106 00:12:07.520 --> 00:12:13.120 Herbert Hoover and Franklin Roosevelt, as we'll see Herbert Hoover later today and Franklin 107 00:12:13.120 --> 00:12:20.320 Roosevelt in a future talk, those presidents and their administrations pursued policies 108 00:12:20.320 --> 00:12:25.720 that prolonged the downturn of 1929 into a depression that plagued the country throughout 109 00:12:25.720 --> 00:12:28.920 about the 1930s and beyond. 110 00:12:28.920 --> 00:12:34.240 The free market therefore is responsible neither for the initial downturn nor for the duration 111 00:12:34.240 --> 00:12:36.160 of the Great Depression. 112 00:12:36.160 --> 00:12:41.440 The culprit in the first case is the Federal Reserve System, a non-market institution created 113 00:12:41.440 --> 00:12:46.380 by active Congress, and in the second case is federal government policy that severely 114 00:12:46.380 --> 00:12:50.720 hampered the economy's ability to recover and adjust. 115 00:12:50.720 --> 00:12:54.940 Unfortunately, the Austrian theory of the business cycle, in spite of winning one of 116 00:12:54.940 --> 00:13:00.940 One of its architects, the Nobel Prize, remains one of the best-kept secrets of economics. 117 00:13:00.940 --> 00:13:07.940 Now what about Herbert Hoover, elected president in 1928, and his response to the Depression? 118 00:13:07.940 --> 00:13:11.940 Well, the version of American history that students learn in school goes something like this. 119 00:13:11.940 --> 00:13:16.940 Herbert Hoover, who had the misfortune of being president during the Great Depression, 120 00:13:16.940 --> 00:13:20.940 was wedded to an old-fashioned philosophy of rugged individualism 121 00:13:20.940 --> 00:13:24.940 that was no longer relevant to the advanced American economy. 122 00:13:24.940 --> 00:13:28.940 When the Depression struck, therefore, Hoover did not take decisive action, 123 00:13:28.940 --> 00:13:36.940 since, as a strict supporter of laissez-faire economics, he believed the government should never interfere in the economy. 124 00:13:36.940 --> 00:13:44.940 Well, this depiction of Hoover, which was fashionable among historians in the decades following Franklin Roosevelt's New Deal, 125 00:13:44.940 --> 00:13:48.940 has more or less been overturned, finally, in recent years. 126 00:13:48.940 --> 00:13:53.940 But while most professional historians have at last come to acknowledge the truth of the matter, 127 00:13:53.940 --> 00:13:59.940 the popular rendition of these events continues to portray Hoover as the laissez-faire stooge 128 00:13:59.940 --> 00:14:05.940 who could have helped people during a time of great deprivation, but callously allowed them to suffer. 129 00:14:05.940 --> 00:14:10.940 Well, first things first, did Hoover in fact believe in the unhampered market economy? 130 00:14:10.940 --> 00:14:19.040 Not at all, and he made this point clear time and again during his tenure as Secretary of Commerce throughout the 1920s. 131 00:14:19.040 --> 00:14:25.640 The United States, in the words of Hoover, had abandoned the laissez-faire of the 18th century, 132 00:14:25.640 --> 00:14:32.840 and he said new emphasis had been placed on, in his words, social and economic justice, and he went on to add, 133 00:14:32.840 --> 00:14:37.840 We have learned that the impulse to production can only be maintained at a high pitch 134 00:14:37.840 --> 00:14:44.840 if there is a fair division of the product by certain restrictions on the strong and the dominant. 135 00:14:44.840 --> 00:14:49.840 Absolutely free competition, according to Hoover, yielded economic chaos 136 00:14:49.840 --> 00:14:54.840 and needed to be replaced by some form of voluntary economic planning. 137 00:14:54.840 --> 00:14:59.840 Hoover possessed the typical progressive confidence in the ability of various classes of experts 138 00:14:59.840 --> 00:15:09.840 to plan the economy scientifically, and more efficiently than could the aggregate of individuals and their own plans that comprised the unhampered market. 139 00:15:09.840 --> 00:15:15.840 But Hoover did not think the Federal Government should be the primary player in accomplishing this regulation and economic planning, 140 00:15:15.840 --> 00:15:25.840 since he believed that government power was difficult to control once unleashed, burdened the private economy, and undermined incentives to produce and innovate. 141 00:15:25.840 --> 00:15:31.840 The federal government should instead serve as the great coordinator of the various lesser organizations. 142 00:15:31.840 --> 00:15:41.840 In addition to local government, Hoover made specific mention of the chambers of commerce, trade associations, labor unions, bankers, farmers and propaganda associations. 143 00:15:41.840 --> 00:15:50.840 Hoover looked to this kind of government-business cooperation to deal with issues ranging from unemployment to housing, industrial waste and foreign trade. 144 00:15:50.840 --> 00:15:59.840 In normal circumstances, the Great Depression was an exception, as we'll see, the Federal Government would be confined to this coordinating role. 145 00:15:59.840 --> 00:16:05.840 The trade associations of which Hoover spoke were voluntary organizations of firms in a particular industry. 146 00:16:05.840 --> 00:16:13.840 Hundreds of them had been organized by the 1920s that were thought to serve a variety of useful social and economic purposes. 147 00:16:13.840 --> 00:16:19.840 Ellis Hawley is one of the most important scholars of this phenomenon and he says, 148 00:16:19.840 --> 00:16:28.840 As guild-like collectivities led by enlightened and public-spirited men, these cooperative institutions could develop codes of ethical behavior, 149 00:16:28.840 --> 00:16:36.840 desirable patterns of social obligation, and the harmonious productivity of which an integrated and purposeful commonwealth was capable. 150 00:16:36.840 --> 00:16:49.840 These associations were urged to adopt codes of so-called fair competition governing their industry that would limit each firm's liberty to some degree in order to stabilize the industry as a whole. 151 00:16:49.840 --> 00:16:56.840 Henry S. Dennison, president of Dennison Manufacturing Company, called for exactly that and he said, 152 00:16:56.840 --> 00:17:14.840 We must manage ourselves if we are to gain on the past. No laissez-faire, no unchanneled and unimpeded course of nature, no invisible hand will do it for us. We now find ourselves in a period of growing social self-control. 153 00:17:14.840 --> 00:17:21.840 Denison's comments were typical of what people were hearing from business leaders in the early 20th century. 154 00:17:21.840 --> 00:17:26.840 One trade association executive condemned the businessman who operated his business, 155 00:17:26.840 --> 00:17:32.840 quote, in entire disregard of the effects on his competitor and the rest of the industry. 156 00:17:32.840 --> 00:17:39.840 Another businessman complained, quote, our profits are absolutely unprotected. 157 00:17:39.840 --> 00:17:43.340 The American Bottlers of Carbonated Beverages declared, 158 00:17:43.340 --> 00:17:54.340 My desire shall not be to undersell my fellow bottlers, but to contend with them for first place in the quality of my products and the service I render my patrons. 159 00:17:54.340 --> 00:17:58.840 Business magazines consistently echoed this kind of talk. 160 00:17:58.840 --> 00:18:08.340 In the 1920s the Federal Trade Commission, or FTC, held conferences with various industries in order to identify competitive practices 161 00:18:08.340 --> 00:18:12.340 that the bulk of existing firms considered unfair. 162 00:18:12.340 --> 00:18:18.340 So-called Group 1 rules governed practices forbidden by the antitrust laws. 163 00:18:18.340 --> 00:18:24.340 More interesting though were the Group 2 rules, which dealt with practices that were not strictly illegal, 164 00:18:24.340 --> 00:18:28.340 but that many firms in an industry simply agreed were unfair. 165 00:18:28.340 --> 00:18:33.340 The FTC expected the trade associations to police their own firms, 166 00:18:33.340 --> 00:18:37.340 but in many cases the associations issued formal complaints with the FTC 167 00:18:37.340 --> 00:18:43.340 The FTC sometimes issued cease-and-desist orders against offending firms. 168 00:18:43.340 --> 00:18:48.340 I might note as an aside that in a study for the George Washington Law Review, 169 00:18:48.340 --> 00:18:51.340 two scholars concluded that businesses at the time, 170 00:18:51.340 --> 00:18:56.340 quote, were all too prone to regard as unfair competition 171 00:18:56.340 --> 00:19:00.340 almost any kind of active competition that discommoded them, 172 00:19:00.340 --> 00:19:04.340 particularly if it related to price. 173 00:19:04.340 --> 00:19:06.340 related to price. 174 00:19:06.340 --> 00:19:12.340 So here was an example of the much touted government business cooperation of the 1920s. 175 00:19:12.340 --> 00:19:17.340 Fair competition codes hampered newcomers to an industry. 176 00:19:17.340 --> 00:19:22.340 Established firms enjoy many advantages including name recognition and public trust. 177 00:19:22.340 --> 00:19:25.340 If newer firms are to have any success against them, 178 00:19:25.340 --> 00:19:31.340 they need to be able to compete in particularly vigorous and innovative ways. 179 00:19:31.340 --> 00:19:38.360 But if competitive methods become fairly standardized through the kinds of agreements established during the 1920s, 180 00:19:38.360 --> 00:19:46.360 explains law professor Butler Schaeffer, and the newer firm is required to adhere to the same patterns as the established firm, 181 00:19:46.360 --> 00:19:50.360 the newcomer will find itself at an even greater disadvantage. 182 00:19:50.360 --> 00:19:58.360 It will have been deprived of the means of offering the necessary inducements to attract customers away from the established firms. 183 00:19:58.360 --> 00:20:08.360 For all their pleasant rhetoric, therefore, these schemes amounted to conspiracies within many American industries to prop up prices and to suppress competition. 184 00:20:08.360 --> 00:20:18.360 Although historians, who in all other situations are willing to ascribe the basest motives to businessmen, have typically been rather indulgent in their treatment of these codes. 185 00:20:18.360 --> 00:20:24.360 The medieval scholastics criticized the guilds of their day for doing exactly this. 186 00:20:24.360 --> 00:20:28.360 Now the same mentality had overtaken the American business community. 187 00:20:28.360 --> 00:20:32.360 Adam Smith's observation in the 18th century is apropos. 188 00:20:32.360 --> 00:20:38.360 He said people of the same trade seldom meet together even for merriment and diversion, 189 00:20:38.360 --> 00:20:45.360 but the conversation ends in a conspiracy against the public or in some contrivance to raise prices. 190 00:20:45.360 --> 00:20:50.360 Now it's true that Hoover did not envision compelling businesses to comply with these schemes. 191 00:20:50.360 --> 00:20:53.360 These agreements would be essentially voluntary. 192 00:20:53.360 --> 00:21:13.360 But for all Hoover's protestations to the contrary, journalist John T. Flynn could see where the system of voluntary, so called, restraints on business was bound to lead to the government's use of force against firms that refused to comply with the regulations and requirements dreamed up by industry leaders. 193 00:21:13.360 --> 00:21:17.360 Flynn said that trade associations, and these are Flynn's words, 194 00:21:17.360 --> 00:21:24.360 are harassed by the unwillingness of those rebellious and adventurous spirits who refuse to accept their rule. 195 00:21:24.360 --> 00:21:30.360 They are forever running into the disturbing fact that while a trade may, after a fashion, rule itself, 196 00:21:30.360 --> 00:21:34.360 it cannot rule some other trade which is in collision with it. 197 00:21:34.360 --> 00:21:40.360 It is this very weakness which sends trade associations to Congress and the legislatures every year 198 00:21:40.360 --> 00:21:44.860 with appeals to the government to join them in some program of regulation. 199 00:21:44.860 --> 00:21:49.260 But the practice of regulating others is habit-forming. It is a mania. 200 00:21:49.260 --> 00:21:53.760 As soon as men find themselves in a game, they begin to invent rules for that game, 201 00:21:53.760 --> 00:21:57.560 and the more extensive and complicated the rules become. 202 00:21:57.560 --> 00:22:04.060 At first they depend upon a certain spiritual pressure operating through the law of honor to support the rules. 203 00:22:04.060 --> 00:22:07.760 But very soon they seek more effective means of getting the rules obeyed. 204 00:22:07.760 --> 00:22:10.760 This involves a kind of force. 205 00:22:10.760 --> 00:22:16.760 So Hoover's support for these fair competition schemes reveals his lack of confidence in the unhampered market, 206 00:22:16.760 --> 00:22:22.760 and thus his refusal to adopt the strict laissez-faire position falsely ascribed to him. 207 00:22:22.760 --> 00:22:29.760 So the president who first tackled the Great Depression was therefore not inclined to trust the free market. 208 00:22:29.760 --> 00:22:33.760 When the Depression hit, Hoover certainly did not sit back and do nothing. 209 00:22:33.760 --> 00:22:45.760 He called on business leaders, first of all, to refrain from cutting wages and he did this both in meetings at the White House in November 1929 and in follow-up meetings in the ensuing months. 210 00:22:45.760 --> 00:22:56.760 Although the issue of wages was the most pressing, Hoover also called upon business to continue making purchases of raw materials and above all to continue construction and maintenance work. 211 00:22:56.760 --> 00:23:03.760 What Mr. Hoover is really trying to do, the Nation magazine wrote in a November 1929 editorial, 212 00:23:03.760 --> 00:23:09.760 apparently without knowing it, is to create a supreme council of national economy in the United States, 213 00:23:09.760 --> 00:23:15.760 and it will be interesting to see how far he can go in our topsy-turvy capitalist economy. 214 00:23:15.760 --> 00:23:19.760 He is right in wanting a planned economy. 215 00:23:19.760 --> 00:23:24.760 Leo Wolman of the Amalgamated Clothing Workers of America, who is himself an economist of sorts, 216 00:23:24.760 --> 00:23:30.720 scientists described the Hoover conferences as a supreme economic council or Americanized 217 00:23:30.720 --> 00:23:31.720 gauss plan. 218 00:23:31.720 --> 00:23:37.000 Now, no doubt Hoover would have protested such characterizations, but they reveal how 219 00:23:37.000 --> 00:23:42.840 significant many observers considered these early presidential interventions. 220 00:23:42.840 --> 00:23:46.960 Hoover's high-wage policy seems reasonable enough to a casual observer. 221 00:23:46.960 --> 00:23:51.840 Who wouldn't want high wages after all, and wouldn't they stimulate the economy too? 222 00:23:51.840 --> 00:23:55.320 But the idea was in fact terribly ill conceived. 223 00:23:55.320 --> 00:24:00.320 Since an artificial boom had distorted the economy's capital structure, wage adjustments 224 00:24:00.320 --> 00:24:03.900 were essential if the downturn was to be brought to an end. 225 00:24:03.900 --> 00:24:08.880 The necessary readjustments required flexible wage rates in order to direct labor out of 226 00:24:08.880 --> 00:24:14.720 areas in which the boom had created unsustainable expansion and into areas that central bank 227 00:24:14.720 --> 00:24:19.280 distortions had served to deprive of sufficient labor. 228 00:24:19.280 --> 00:24:27.280 Many artificially imposed wage rigidities could only prolong the economy's adjustment process and the suffering that accompanied it. 229 00:24:27.280 --> 00:24:39.280 Hoover believed, wrongly, that reductions in wage rates would harm the economy by depriving wage earners of sufficient purchasing power to buy the goods that businesses were producing. 230 00:24:39.280 --> 00:24:45.280 This is a very common argument and a superficially plausible one, but it is a fallacy. 231 00:24:45.280 --> 00:25:01.280 For our purposes, we may at least note that the Depression actually came in the midst of a dramatic upward trend in the share of national income devoted to wages and salaries and a corresponding downward trend in the share going to interest and dividends and entrepreneurial income. 232 00:25:01.280 --> 00:25:12.280 In other words, the data shows exactly the opposite of what would need to have happened in order to validate the underconsumption theory of Hoover and of amateur economists then and now. 233 00:25:12.280 --> 00:25:23.280 If depressions are caused by insufficient consumer purchasing power, how do we account for a Great Depression that occurred at a time when that purchasing power was at a high point? 234 00:25:23.280 --> 00:25:32.280 While the underconsumptionist explanation for unemployment has declined in respectability in recent decades, it has never gone away entirely. 235 00:25:32.280 --> 00:25:37.680 Now, one of the, in my opinion, most important works of economic history to be published in the late 20th century 236 00:25:37.680 --> 00:25:44.680 is a book called Out of Work by Ohio University economist Richard veteran Lowell Galloway. 237 00:25:44.680 --> 00:25:48.880 And they take on this under-consumptionist explanation. 238 00:25:48.880 --> 00:25:54.580 And they show in this book that wages, a sort of common sense idea, are at cost of doing business 239 00:25:54.580 --> 00:25:58.980 and that artificially increasing wage rates beyond the level prevailing on the market 240 00:25:58.980 --> 00:26:06.980 will simply create unemployment as businesses begin to demand less labor and or to substitute capital for the overpriced labor. 241 00:26:06.980 --> 00:26:09.980 By the way, one economist put it, 242 00:26:09.980 --> 00:26:17.980 an unemployed laborer has no purchasing power at all, however high may be the wage rate he would get if he had a job. 243 00:26:17.980 --> 00:26:19.980 Pretty relevant point, I think. 244 00:26:19.980 --> 00:26:27.980 Now, what this means in short is that Hoover's demand for high wages, even in depressed economic conditions, he's calling for high wages, 245 00:26:27.980 --> 00:26:31.980 undoubtedly worsened rather than improve the situation. 246 00:26:31.980 --> 00:26:34.980 Lyle Robbins, who was an economist, said, 247 00:26:49.980 --> 00:26:51.980 Another critic put it this way, 248 00:26:57.980 --> 00:27:03.860 Its effect would be, rather, to make unemployment complete rather than partial. 249 00:27:03.860 --> 00:27:07.860 Although Hoover did not force business to abide by his high-wage policy, the president's 250 00:27:07.860 --> 00:27:10.960 appeal nevertheless had substantial impact. 251 00:27:10.960 --> 00:27:14.900 Not only did business leaders want to please the president, but in some cases they actually 252 00:27:14.900 --> 00:27:19.560 believed that high wages were necessary for their own prosperity. 253 00:27:19.560 --> 00:27:24.500 Many contemporary observers commented on the extent of business cooperation with Hoover's 254 00:27:24.500 --> 00:27:25.500 request. 255 00:27:25.500 --> 00:27:29.500 In early 1930, for example, Businessweek published an article called 256 00:27:29.500 --> 00:27:35.500 This Time They Did Not Cut Wages. Late that year, economist Carter Goodrich observed 257 00:27:35.500 --> 00:27:38.500 at a meeting of the American Economic Association, 258 00:27:38.500 --> 00:27:46.500 it seems highly probable that the year 1930 will also show an increase rather than a decrease in the rates of real wages. 259 00:27:46.500 --> 00:27:51.500 Leo Wallman said it was impossible to cite any similarly severe depression 260 00:27:51.500 --> 00:27:56.500 in which what he called the wages of prosperity were maintained for so long. 261 00:27:56.500 --> 00:28:01.500 Something called the Alexander Hamilton Institute observed in 1931 that, 262 00:28:01.500 --> 00:28:08.500 quote, the efforts to maintain wage scales have been an important factor in prolonging the business depression. 263 00:28:08.500 --> 00:28:14.500 In 1930, ignoring the all but unanimous advice of economists, Hoover signed the Smoot-Hawley Tariff, 264 00:28:14.500 --> 00:28:20.500 which raised tariffs an average of 59% on more than 25,000 items. 265 00:28:20.500 --> 00:28:30.500 Among other things, the tariff damaged the American export sector when other countries retaliated by making it difficult, if not impossible, for Americans to sell their goods abroad. 266 00:28:30.500 --> 00:28:42.500 But another aspect of the tariff, overlooked in nearly every major study of the Hoover years, was at least as important the contribution the President thought it could make to his high-wage policy. 267 00:28:42.500 --> 00:28:54.500 As veteran Galloway point out, tariffs insulate the owners of both labor and capital resources from foreign competition, allowing them higher prices for their output and, in the case of labor, higher wages. 268 00:28:54.500 --> 00:28:56.500 and higher wages. 269 00:28:56.500 --> 00:29:00.500 Veteran Galloway go on to suggest that the unemployment rate 270 00:29:00.500 --> 00:29:06.500 would have been 3.8% lower by 1932 in the absence of these tariff increases, 271 00:29:06.500 --> 00:29:13.500 making the tariff responsible for about 20% of the increase in unemployment since 1929. 272 00:29:13.500 --> 00:29:19.500 Overall, Veteran Galloway conclude that Hoover's high-wage policy accounts for 77% 273 00:29:19.500 --> 00:29:24.500 of the observed increase in unemployment from 1929 to 1931. 274 00:29:25.500 --> 00:29:30.500 The high-wage policy by no means exhausted Hoover's anti-depression program. 275 00:29:30.500 --> 00:29:34.500 Public works expenditures also increased dramatically under Hoover, 276 00:29:34.500 --> 00:29:40.500 with more money devoted to them in Hoover's four years than during the previous two decades. 277 00:29:40.500 --> 00:29:46.500 Substantial tax hikes were also introduced, as federal levies were imposed on countless products and services, 278 00:29:46.500 --> 00:29:52.180 Mises, and income tax rates approached World War I levels. Hoover's interventions to prop 279 00:29:52.180 --> 00:29:58.180 up farm prices at a time of general deprivation were a forerunner of Franklin Roosevelt's. 280 00:29:58.180 --> 00:30:02.660 Hoover also signed the Norris LaGuardia Act on behalf of organized labor. There's more 281 00:30:02.660 --> 00:30:08.740 on that in my forthcoming book. He established the Reconstruction Finance Corporation, which 282 00:30:08.740 --> 00:30:13.020 extended low-interest loans to businesses in trouble and extended credit to the states 283 00:30:13.020 --> 00:30:17.020 in order to fund public works projects. 284 00:30:17.020 --> 00:30:22.420 So how in the world did Herbert Hoover get the reputation as a believer in laissez-faire 285 00:30:22.420 --> 00:30:26.580 when he was actually responsible for the greatest peacetime expansion of the federal government 286 00:30:26.580 --> 00:30:29.740 in American history to that point? 287 00:30:29.740 --> 00:30:34.100 It may have had to do with his hesitation to institute direct federal relief programs 288 00:30:34.100 --> 00:30:38.860 preferring to lend money to the states for relief instead, or with his failure to spend 289 00:30:38.860 --> 00:30:42.620 still more money on public works programs. 290 00:30:42.620 --> 00:30:48.540 But the answer may also involve Hoover's opposition to Franklin Roosevelt's New Deal of the 1930s. 291 00:30:48.540 --> 00:30:53.100 Hoover did not reject the New Deal, root and branch, nor could he if he wanted to be consistent 292 00:30:53.100 --> 00:30:55.820 since so much of the New Deal grew out of his own programs. 293 00:30:55.820 --> 00:31:01.540 Rexford Tugwell, who was an important economic advisor to FDR, Franklin Roosevelt, later 294 00:31:01.540 --> 00:31:05.780 said most of what Hoover began would be taken over by Roosevelt and then called the New 295 00:31:05.780 --> 00:31:07.660 Deal. 296 00:31:07.660 --> 00:31:12.640 Hoover merely rejected the lengths to which FDR's interventions went, making his difference 297 00:31:12.640 --> 00:31:16.180 with FDR one of degree, not of kind. 298 00:31:16.180 --> 00:31:20.600 But historians have never been particularly good at drawing such distinctions, and thus 299 00:31:20.600 --> 00:31:24.480 was born the myth of the laissez-faire Hoover. 300 00:31:24.480 --> 00:31:30.160 Now even those who concede that Hoover was far from passive in the midst of the Depression, 301 00:31:30.160 --> 00:31:35.620 these folks will typically conclude that even so, he still didn't do enough to address 302 00:31:35.620 --> 00:31:38.260 against the country's economic woes. 303 00:31:38.260 --> 00:31:43.980 But Hoover's much more interventionist successor, Franklin Roosevelt, oversaw continuing double-digit 304 00:31:43.980 --> 00:31:46.900 unemployment and similarly dreadful statistics. 305 00:31:46.900 --> 00:31:52.220 Moreover, the Depression that hit the country in 1920, which was in some ways worse than 306 00:31:52.220 --> 00:31:57.540 the Great Depression, was entirely over by 1921, when the country was once again setting 307 00:31:57.540 --> 00:31:59.500 production records. 308 00:31:59.500 --> 00:32:04.820 All President Warren Harding had done was cut government expenditures, the very opposite 309 00:32:04.820 --> 00:32:09.820 of the advice Keynesian economists gave presidents throughout the 20th century. 310 00:32:09.820 --> 00:32:14.820 Dare we propose that Hoover, instead of doing too little, did too much?