Saturday, April 12, 2008

Hoover's New Deal

Murray Rothbard with a classic essay, reproduced today at

Rothbard titled it "Hoover's attack on laissez-faire". In this essay, he deals with the (damaging) fallacy that Hoover was himself laissez-faire about the economy. (The original has 44 footnotes if you want to follow up on his thoughts and cites.)

I don't get all that nervous about replicating the Great Depression-- since it would take an unbelievable string of boneheaded policies (as we saw in the 1930s under Hoover, FDR, and the Fed). But Bush, Congress and the current Fed are so active in the economy that they are threating us with a milder version of the same thing today.

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses....

Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America's first great depression, 1819, when the federal government's only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments, which periodically permitted insolvent banks to continue in operation without paying their obligations. In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year – in what Dr. Benjamin M. Anderson has called "our last natural recovery to full employment."

Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the "Hoover New Deal." For if we define "New Deal" as an anti-depression program marked by extensive governmental economic planning and intervention – including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) – Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.

Hoover's role as founder of a revolutionary program of government planning to combat depression has been unjustly neglected by historians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover's tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market. To portray the interventionist efforts of the Hoover administration to cure the depression, we may quote Hoover's own summary of his program, during his presidential campaign in the fall of 1932:

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. We put it into action…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered…. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world....

Of course, high real wages are not something to brag about during an economic slow-down-- since wages are trying to adjust downwards! This is an indication of Hoover's success in distorting markets in a manner that would promote unemployment-- a practice and extended by FDR.

Rothbard then goes on, at great length, about the development and exercise of Hoover's views throughout the 1920s. But I leave that to the link if you want to read more...


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