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Thursday, August 18, 2011

FDR’s Advisers Knew What Rachel Maddow and Paul Krugman Don’t

The myth of Hoover's laissez faire.

One persistent myth that libertarians and other free-market types have to unmask is that President Herbert Hoover’s belief in laissez faire was responsible for dramatically worsening what became the Great Depression.  The myth that Hoover stood around and did nothing while the economy collapsed gets repeated ad nauseum in the media by pundits including everyone from Nobel Prize winners like Paul Krugman to, most recently, MSNBC talk-show host Rachel Maddow.

The punditry is right about one thing: Hoover can be blamed for turning what would have likely been a severe but short market correction in the wake of the artificial boom of the 1920s into a deep and long Great Depression.  The reason, however, is not that Hoover did nothing, but that he did many things.  Hoover, much like FDR, was skeptical about free markets, as both his earlier work as secretary of commerce and his own description of his beliefs made clear. Faced with the worsening crisis in the fall of 1929, he expanded the federal government’s role in a whole variety of ways.

Long List of Interventions

Without going into detail about any one of them, the Hoover interventions include: expanded public works, greater government control over agriculture, the Smoot-Hawley tariff, a virtual end to immigration, government loans for construction and other businesses, and greater enforcement of antitrust laws.   Most important was Hoover’s pressuring businesses to not cut wages even as the prices of their output fell.  The result was higher real wages, which were responsible for the unemployment rate topping out at 25 percent, causing the greatest human toll of the Great Depression.  (I ignore here the very important mistakes made by the Federal Reserve System in allowing the major deflation to take place, not because it was unimportant – it was crucial to making matters worse – but because Hoover had no real control over the Fed.)

Hoover also proposed budgets that raised total federal expenditures by almost 50 percent in nominal dollars and over 60 percent when we adjust for the deflation.  He ran budget deficits in 1931 and 1932 that were 52.5 percent and 43.3 percent of total federal expenditures those two years.  No year under Roosevelt between 1933 and 1941 had a deficit that large.  Finally, in 1932 Hoover presided over the largest peacetime tax increase in U.S. history, which among other things increased the income-tax rate on top incomes from 25 to 63 percent. This is hardly the program of a man committed to laissez faire.

More interesting, though, is that people at the center of the action during the Great Depression knew that the differences between Hoover and FDR were small.  For example, consider the “Brains Trust,” the group of advisers who surrounded FDR in the campaign and after the election.  Two of its most prominent members were Rex Tugwell and Raymond Moley, professors of economics and law, respectively.  Tugwell and Moley recognized both at the time and subsequently that the policy initiatives of the New Deal owed much to ideas and programs that Hoover began.

New Deal Owed Much to Hoover

For example, Tugwell said of his time with FDR: “When it was all over, I once made a list of New Deal ventures begun during Hoover’s years as Secretary of Commerce and then as president…. The New Deal owed much to what he had begun.”  In 1948 Moley wrote of that period:

When we all burst into Washington … we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA, the PWA, the emergency relief setup were all there. Even the AAA was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC, probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration.

In the 1960s Tugwell wrote to Moley and said of Hoover, “[W]e were too hard on a man who really invented most of the devices we used.”

They were correct in claiming that a great part of the New Deal was anticipated by things Hoover did as president.  Hoover dramatically worsened the depression, but not by sitting idly by while the economy crashed.  It was his expansion of government intervention that did the damage, just as the massive intervention of the Bush and Obama administrations has likewise turned a market correction into a major recession, and perhaps worse.

Intellectuals and pundits need to learn their history from somewhere other than Annie or a high school history textbook.  Reading what their own hero’s advisers said would be a start.  If they don’t get the story straight they will continue to be the enablers of the myth that promotes the very thing they are opposing:  a repeat of the disastrous Hoover presidency.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.