With all of the recent talk about “the new Depression” that we may already be experiencing, I decided to crack open a few history books and do a little online research in order to increase my understanding of the events leading up to the Great Depression. In particular, I wanted to review the response of the Hoover Administration to the stock market crash of 1929, and re-examine the actual efforts of the Hoover Administration to bolster the economy that was left foundering in the wake of the Crash.
I already knew that one of the biggest lies taught to students of American history is that Herbert Hoover “did nothing” to stop the Great Depression. The Hoover canard goes something like this – Hoover believed that the Federal Government had no responsibility to financially aid its citizens, and he ignorantly trusted the free market to correct itself and bring about its own recovery. Students are usually left with a mental picture of Hoover sitting behind his desk, puffing a big cigar, oblivious to the suffering around him. In reality the Hoover Administration pioneered big government efforts to subsidize public works projects, control wages and commodity prices, expand credit, protect farmers, and leverage immigration and foreign trade in an effort lessen the severity of the recession of 1930 – 1931.
Hoover had served as Secretary of Commerce in the Coolidge Administration, and during his tenure at the Department of Commerce he was heavily involved with public works projects, farm subsidy programs, and efforts to provide an ever-increasing number of Americans with the means to buy their own homes. His “Own Your Own Home” campaign was one of the most successful government efforts of the 1920’s, opening up home ownership opportunities to average Americans through long-term mortgages (a novel idea at the time) and greatly bolstering the construction industry. The number of homes built during the 1920’s that survive to this day are a testimony to the effectiveness of this program.
In the months immediately following the October 1929 stock market crash, Hoover personally met with the heads of the telephone, steel, automotive, construction industries and urged them to pledge new expansion programs and promise not to cut wages, and to shorten work weeks rather than lay off workers. The Federal Reserve added $300 million to the cash reserves of the nation’s banks and urged banks to expand credit. $400 million in Federal subsidies for state public works projects was also approved.
Hoover believed that the government should cooperate fully with farmers and offer whatever incentives were required in order to keep commodity prices from falling, thus protecting farmers from financial ruin. The Hoover administration’s Federal Farm Board attempted prop up wheat and cotton prices by encouraging private farm co-ops and expanding Federal farm subsidies that were already in place. Wheat production was bountiful in 1930 and 1931, and wheat prices fell because there was more wheat than the market could handle. Flush with money provided by government subsidies, farmers responded by producing even more wheat to make up for the loss, instead of diversifying or rotating their crops like the government originally proposed. Both wheat and cotton were bought up by the government and held off the market in an effort to raise commodity prices, but to no avail. Drought struck the Great Plains in 1931 and 1932, and when government subsidies ran out, farmers went bankrupt. Sadly, this devastating turn of events was followed in the Midwest by the previously unimaginable horror of the Dust Bowl years of 1933 through 1936.
By the end of 1930 unemployment in non-subsidized sectors of the economy had risen dramatically. Artificially high commodities prices and wages, combined with the cash infused into the banking system, caused prices for consumer goods to rise. Unions took rising prices, and the previous year’s good faith agreements by industry leaders not to lower wages, as a cue to push hard for higher wages and more benefits. While workers in subsidized industries were well-off, the unemployed suffered greatly. Industries without large Federal subsidies continued to lay off workers, and subsidized industries were forced to pay workers artificially inflated wages, thus they could not afford to hire new workers. In an effort to keep commodity prices artificially high and to protect American jobs, Congress passed major tariff increases through the Smoot-Hawley bill, which in turn triggered a world-wide recession in 1931 – 1932.
Although the Hoover Administration created and funded a tremendous amount of public works projects and appropriated generous industry subsidies, these actions failed to put enough money into the pockets of enough workers to offset the shrinkage of the economy. Consumers began spending less. Banks began to fail as increasing numbers of depositors cashed in their accounts. The Hoover Administration tried to foster private cooperation between large and small banks, but managers of small banks balked at the idea of being pushed around by larger, more powerful institutions, and the heads of large banks refused to risk any of their capital to help small banks through uncertain times. President Hoover signed the Glass-Steagall act into law early in 1932; this law allowed the Federal Reserve for the first time to print currency that was backed up with government bonds. Glass-Steagall also differentiated investment banks from commercial banks. Commercial banks were supplied with fresh cash reserves and encouraged to make loans. Additional government subsidies were appropriated to provide funding for emergency bridge loans designed to prevent foreclosures.
1932 saw the most severe economic down-turn in American history, and the official start of the Great Depression. Production and gross domestic product fell drastically, and unemployment increased drastically. In order to offset the huge $2.2 billion Federal government deficit, which was largely due to the cost of its numerous subsidy programs, President Hoover proposed a massive federal tax increase that went into effect at the beginning of 1932. Hoover amended bankruptcy laws to make bankruptcy (and the subsequent loss of investor’s capital) more difficult. He doubled up Federal government efforts to investigate what had been deemed unfair trading practices in the stock market. But banks continued to fail — bank failures in 1931 and 1932 had wiped out over $1.5 billion in depositor’s assets — and increased tax burdens pulled even more money out of the private sector. The Hoover administration attempted to crack down on “hoarding” (e.g. cashing in bank deposits and saving cash money) by deeming such actions “unpatriotic,” but to no avail. In July 1932 the Dow Jones industrial average hit its lowest index value ever, dropping 89% from its 1929 high. The combination of stock market woes and bank failures effectively wiped out 30% of the US economy by the end of 1932.
But the Hoover Administration’s greatest public relations and political failure was its handling of the Bonus Army March. In the summer of 1932, over 40,000 World War I veterans and their families marched on Washington and demanded payment of their service bonuses. These payments were based on the difference between the small amount of money that the veterans were paid for serving in the military, and the full amount of money that they could have earned had they been able to work full time during the period of their military service. The bonuses to WWI veterans were approved by Congress in 1924 as 20 year notes, payable in full by 1945. The government already allowed veterans to take out loans of up to 50% of their bonus payment value, but the veterans, many of them completely destitute and with no way to provide for their families, demanded immediate payment in full. Hoover rejected this notion simply because the government was already overspent and did not have the money to pay out what was estimated to be a debt of over $3 billion. The veterans and their families built a shanty town near the federal district of Washington D. C. and organized daily protests and parades through the D. C. streets.
On July 28, the Attorney General ordered the D. C. police to break up the protests and disperse the protesters. Shots were fired, and two veterans were killed. Panicked by the disturbance, President Hoover ordered the United States Army to continue the dispersal; he assumed that soldiers and veterans would not clash violently with one another. The 12th Infantry Regiment, commanded by General Douglas MacArthur, approached the veteran protesters with bayonets fixed, then launched tear gas into the crowd. They chased the protesters back to the shanty town. Fearing that the Bonus Army protesters were planning a mass uprising against the government, General MacArthur ignored direct orders from President Hoover to stand down, and proceeded to destroy the shanty down, killing several veterans and injuring hundreds of civilians, including women and children. General MacArthur was never officially reprimanded for disobeying his Commander in Chief, and the public was left with the impression that Hoover personally ordered the Army to attack destitute civilians.
Hoover’s dull personality and lack of political skills made him the perfect target for Democrats eager to regain control of the government. Charles Michelson, head of the Democratic National Committee, dubbed the nation’s numerous shanty villages “Hoovervilles”. Prominent Democrats, including New York governor Franklin Roosevelt, who had enthusiastically supported Hoover’s early efforts at freezing wages and subsidizing private industry, suddenly became staunch and vocal critics of those policies. As a Presidential candidate, Roosevelt actually campaigned against Hoover’s wage and price controls and public works subsidies, even though he gladly accepted them while governor of New York.
After Roosevelt won the 1932 election in a landslide, he refused to work with the Hoover Administration to set up an emergency bank relief program; instead, he chose to let banks fail and then lay blame solely on the Hoover administration. Roosevelt did not announce any major banking reforms until after his inauguration on March 15, 1933. So great was Roosevelt’s desire to besmirch the legacy of Herbert Hoover that he even succeeded in having Hoover’s name stricken from his most ambitious public works project — the enormous concrete hydroelectric dam in the Black Canyon of the Colorado River near the southern tip of Nevada. Roosevelt and his new Interior Secretary Harold Ickes had it rechristened “Boulder Dam”. It took an act of Congress to restore the dam’s original name, “Hoover Dam,” in 1947.
Hoover’s policies ultimately failed because both his advisers and the Congressional leadership failed to account for unforeseen circumstances such as the run on the nation’s banks, and the sudden shift from agricultural commodity surpluses to shortages due to drought and soil erosion. The Roosevelt Administration only partially succeeded because they dared to enact policies that forced a large-scale overhaul of the nation’s banking system, and eventually put government handouts directly into the pockets of individual citizens — two ground-breaking expansions of government power that Herbert Hoover refused to do.
All in all, Hoover’s economic stability and recovery policies seem eerily similar to policies being discussed today — massive outlays for public works projects, subsidies for the home districts and pet industries of powerful lawmakers, demands by union representatives for guaranteed wages and benefits and large-scale expansions of union powers, and calls for increased government regulation of the financial industry. Many leading economists now argue that Hoover and Roosevelt’s attempts to control markets and manage large sectors of the economy actually worsened the economy and hindered recovery. Hoover had theories and ideas but no practical history of government intervention to learn from. We, on the other hand, have the benefit of nearly 80 years of interventionist government policies both here and in other nations to study. I can only hope that our current administration takes those lessons of history seriously.