Hoover’s response to the October 1929 crash

[Part of "The Dangerous Lessons of 1937"; read the introduction here.]

Although we are concerning ourselves with the events which took place between 1933 and 1936, a brief overview of Hoover’s response to the beginning of the recession in October 1929 is important.  It will show that Roosevelt’s New Deal was not unique, and that a nearly identical program was originally ignited under Hoover’s administration.  This is important because after one has an understanding of the true scale of Hoover’s fiscal spending figures one can deduct that if government spending did not work during the first three years of the 1930s, there is no reason that it should have worked during the next four, either.  In fact, in many ways Roosevelt’s New Deal damaged a recovery by forcing industry to comply with unnecessary restrictions and regulations, disallowing a serious effort to invest.  However, it is also worth noting that the Federal Reserve’s consistent attempts to counteract decreases in bank reserves due uncontrolled withdrawals also hampered the quick liquidation of unhealthy assets, causing a longer than usual recession.  Understanding the Federal Reserve’s actions during the first four years of the Great Depression will provide a historical background which explains why the monetary expansion during Roosevelt’s first term and beginning of his second term were not arbitrary.  In other words, the first four years of the Great Depression go a long way in explaining the trends which would continue to exist throughout the Roosevelt administration, up until the beginning of the Second World War in Europe (it was at this time that the United States Armed Forces began a massive mobilization effort to prepare themselves for eventual war across the Atlantic and Pacific Oceans).

The Federal Reserve responded to the bank’s loss of liquidity after the original crash of October 1929 by shoring up bank reserves by adding roughly $300 million to the money supply by November of that same year.  Between October and December controlled reserves had risen by $359 million, while uncontrolled reserves had fallen by $381 million.  As a result, there was an estimated $21 million decrease in bank reserves for the first three months of the Great Depression.[1] 1930 saw the beginnings of an even greater inflationary process, with the New York Federal Reserve reducing the rediscount rate from 4½% in February 1930 to 2% by the end of that same year.  However, again, despite the Federal Reserve’s inflationary measures, the money supply fell by roughly 250 million dollars.[2] Although the Central Bank continued in its effort to pump money into the system it failed in its efforts to create more money than was being lost through the decline in uncontrolled reserves, meaning that throughout 1931 and 1932 there was still a decline in the money supply.  The claim that the Federal Reserve did nothing to counteract the deflating effects of the bust bases its factual evidence on the general decrease in the volume of the money supply.  However, Monetarists need to take a closer look at the history of the United States’ money supply during this era, and need to account for why the decrease in the money supply was so gradual.

It was not only the Federal Reserve which quickly moved to impede a quick liquidation in 1929.  Hoover too took matters into his own hands, beginning a large fiscal spending program in an effort to relieve unemployment and bolster aggregate demand.[3] Total government outlays in 1932, for example, amounted to $4.659 billion, which was higher than the federal expenditure of 1933 under President Roosevelt ($4.598 billion).[4] During Roosevelt’s presidential campaign, the Democratic candidate consistently attacked Hoover for his high fiscal spending, considering Hoover’s decisions during his four-year term as “reckless and extravagant” and promoting his own objective of balancing the budget.[5] Hoover also did much to regulate the labor market, believing that by maintaining high wage rates the economy would recover.[6] Instead, high nominal wages—despite a decrease in the general price level—caused a massive loss of profit.  For example, the First National City Bank of New York reported that less than six percent of banks surveyed were reporting losses in mid-1929.  This percentage skyrocketed to 29 percent by the third-quarter of 1930.[7] Hoover’s high-wage policy backfired, as a decline in loanable funds helped gross private domestic investment falling by over 65 percent between 1929 and 1931.[8] Hoover’s intervention during his four year term as president served only to exacerbate the economic rut which would be known as the Great Depression.

Roosevelt’s New Deal, which would unfold mainly between 1933 and 1936, was not something unique.  As aforementioned, Roosevelt had been an insistent critic of Hoover’s big-spending government programs during the 1932 election campaign.  In fact, Hoover’s final year of spending saw a higher amount of tax money spent than Roosevelt’s first year.  Although, ultimately, Roosevelt’s deficits would be much larger than those of Hoover, it would be fair to state that Hoover was no “laissez-faire” president.  Furthermore, it is clear that there was no lack of effort on part of the federal government and the Federal Reserve to actively intervene to stall the downward plunge the United States economy was taking.  Did this intervention help assuage the final effects of the depression?  One could certainly assume that the economy would have bottomed-out in much worse condition.  However, when proponents of the New Deal argue that Hoover was laissez-faire, thus recognizing that the economic condition of the country in 1933 was as bad as it could have been, any attempts to protect Keynesian theory must be subject to suspicion.  Besides, how does one quantify what the state of the economy would have been otherwise?  Indeed, empirically speaking, recessions tended to last for much smaller periods of time when there was a lack of intervention—the little spoken of recession of 1921–22 serves as the perfect example.

[2] Rothbard (2008), pp. 212–213.

[3] Rothbard (2008), p. 193.

[4] Statistics provided by the Government Printing Office.

[5] Folsom (2008), p. 40.

[6] Murphy, Robert P., The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery, Washington, D.C.: 2009; pp. 32–34.

[7] Vedder and Gallaway (1993), p. 113.

[8] Vedder and Gallaway (1993), pp. 122–123.