Following an interesting debate with Paul Halsall on Austrian economics and the possibility of economic calculation in a socialist system, Paul posted half the text of an Anatole Kaletsky article in The Times, which made various spurious claims about Austrian economics and history. One of them, which had long ago acquired the status of conventional wisdom, was that the Hoover government had pursued an Austrian approach following the Great Crash, and had thereby exacerbated the following downturn, and discredited Austrian economics from adoption by politicians for ever after. His "evidence" for this is the famous quote from Hoover's Treasury Secretary, Andrew Mellon: "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate".
I meant to reply to this point, but I wanted to be sure I got my facts straight. That meant doing quite a bit of reading and note-taking, and by the time I had finished, it was really a bit late for a response to Paul. But it seems a shame for the effort to go to waste. So I thought I would post it here, for reference or as a challenge (depending whether or not you lazily accept the myth propagated by the interventionists to cover up for their own culpability, and failure (yet again) of their philosophy in practical application).
It's interesting that so many interventionists and socialists cite Mellon's alleged words as evidence for the supposed non-interventionist stance of the Hoover administration. Don't they have any better evidence than that? What the administration did is probably more interesting than what one member is supposed to have said.
I use the words "alleged" and "supposed" because we do not have Mellon's words at first hand. They are given to us by Hoover himself, in the third volume of his memoirs. And Hoover uses them to contrast "the leave-it-alone liquidationists" with his own views and what he claims was the approach of his administration. Hoover was at least consistent in those views and claims - from the early days after the Crash, through his re-election campaign and upto the publication of his memoirs decades later, he claimed consistently to have taken stronger action than any previous administration to try to prevent or ameliorate the collapse - a "program unparalleled in the history of depressions in any country and any time".
We may choose to be sceptical of his claims. Was he trying to rewrite history and provide an alternative scapegoat? But I am not sure why we would believe that his administration carried out a laissez-faire policy, on the basis of a line in his memoirs written to contrast with what he claimed actually happened.
Other commentators reporting in relatively recent retrospect (e.g. Myers and Newton or Wilbur and Hyde) also believed that he had been very active in trying to stimulate the economy. But perhaps they were also biased and re-writing history. We need to look not at the words, but at the events (dear boy, events).
So what did actually happen? Rothbard provides the details (and the references) in America's Great Depression. What follows is my attempt to provide a potted version, with a little help from Friedman's Monetary History of the United States, which broadly agrees on matters of record, though differs substantially on matters of interpretation.
In late '29, following the October crash, Hoover called a series of conferences of leading businessmen and trade unionists, to persuade the former not to cut wages or jobs, and the latter not to increase wage demands. This was a somewhat lop-sided deal, in a climate where there was little prospect that wages could be increased, but he got agreement from most of them (although the trade unionists privately agreed that they would renege if it suited them). The railroad leaders promised to expand their construction and maintenance programs. Businesses like Ford, Standard Oil and DuPont agreed to maintain jobs and wage-rates, and (if the downturn was so severe that this could not be maintained), to spread the work evenly between the workers to avoid redundancy. Ford announced a wage increase. The telephone, steel and automobile industries pledged to expand their construction programs. The building and construction industry leaders pledged similarly to maintain wage-rates and expand their activity, as did the leaders of the big public utilities.
Hoover launched the program of public works that Roosevelt co-opted and christened the New Deal. He wrote to all the state governors, urging the expansion of all state public works programs. He and Mellon proposed an increase in the Federal Buildings program budget of over $400m. Hoover granted subsidies to ship construction through the Shipping Board and asked for another $175m of federal funding for public works. In mid-1930, Professor J.M.Clark described these efforts as a "great experiment in constructive industrial statesmanship of a promising and novel sort".
For farmers, he created entities that intervened in the market to try to prop up prices (which only made matters worse). In 1930, he got Congress to authorize a further $915m public works program, including the Hoover Dam.
But on a monetarist basis, this is not enough. This would all be stymied if action were not taken to try to maintain the money supply. Perhaps the laissez-faire accusation is justified in the financial field?
In the period immediately after the crash, the Fed provided a massive injection of funds into the market. It added $300m to bank reserves, and doubled its holding of government securities ($150m directly, and $200m discounted for member banks). The knock-on effect was an increase in member banks' deposits of $1.8bn (a monetary expansion of 10% in one week). The Fed also dropped its rediscount and acceptance rates sharply, from 6% to 4.5% within the first month in the case of the former. (They were to fall further, to 2% by the end of 1930 and 1.5% by mid-1931.)
After a month (and this amount of stimulus), the market started moving up again, and bank reserves fell back to their pre-crash levels. Reserves controlled by the Fed and bank reserves uncontrolled by the Fed both fell in the short-term, but by the end of the year, controlled reserves were significantly ($359m) up, but were balanced by a similar ($381m) decline in uncontrolled reserves, leaving the net effect slightly down on pre-crash levels. So the Fed was doing its best to keep the money-supply (which actually increased a bit) stable, against strong downward pressure from the market.
After flirting briefly with a laissez-faire, liquidationist approach in December 1929, the Fed returned in early 1930 to a massive easy money program. Rediscount rates were cut from 4.5% to 2% by the end of the year, and other rates fell similarly. Controlled reserves rose by $209m, member bank reserves by $116m, and gold stocks by $309m. The money supply remained roughly static, not because of lack of effort by the government, but because of a reduction in bank lending due to the general depression.
In 1929, GNP was $104.4bn, federal expenditure was $4.1bn and state- and local-government expenditures were $9bn. In 1930, GNP fell to $91.1bn, federal expenditure rose to $4.2bn and state- and local-government expenditures rose to $9.7bn. Federal revenues went from a substantial ($1.2bn) to a small ($0.2bn) surplus, while state- and local-government revenues went from a small ($02.bn) to a substantial ($0.6bn) deficit. The main causes of the changes were, on the expenditure side, increased spending on wages and construction spending, and on the revenue side, a reduction in income- and corporation-tax rates at the federal level. (Rothbard does not explain the fall in state-and local-government revenues, but as sales tax is a significant part of their funding and GNP had fallen signficantly, there is at least one obvious explanation.)
By the end of 1930, many people (including Hoover himself) were congratulating the administration for having seen off the worst of the downturn and ameliorated its impacts (by preventing the necessary corrections), and predicted recovery during 1931 as a result. Keynes hailed the record of maintaining wage rates and found the attitude of the Federal Reserve "thoroughly safisfactory". Only a few economists and businessmen criticised and contradicted this line. Large numbers of economists signed petitions supporting the Wagner Bill that restricted immigration to prop up wages and employment, and massive government borrowing ($1bn and upwards) to fund public works as a means of stimulating construction and putting men to work. Hoover's program of massive intervention was widely seen as right and successful.
Despite the supposed success of these interventionist policies, things got worse during 1931. Americans rightly distrusted their banks and began removing funds. In the first three quarters, despite inflationary Fed policy (controlled reserves up by $195m), total bank reserves fell by $107m, thanks to a $302m fall in uncontrolled reserves (mainly due to withdrawals). In the final quarter, after Britain left the gold standard, bank reserves fell from $2.36bn to $1.96bn, despite the Fed pumping another $268m of new controlled reserves into the system, mainly due to people moving their money from bank deposits to cash and gold. Money supply fell by over $4bn as a result.
Fed rediscount rates had hit 1.5% by mid-1931, but this had not prevented a contraction of the money supply. It had, however, encouraged domestic bank customers and foreign lenders increasingly to move their money out of bank reserves. In the second half of 1931, this flow turned into a flood. The Fed had little choice but to raise re-discount rates, to 2.5% and then 3.5%. Some commentators point to this as a "tight money" policy, but there was little option following the failure of low rates to have the desired effect and given the threat of a dollar collapse. In any case, controlled reserves still increased at these higher rates, so policy was still inflationary rather than tight, just less so than previously.
GNP decreased further in 1931, from $91.1bn to $76.3bn. Federal expenditure rose from $4.2bn to $5.5bn. State- and local-government expenditure remained at $9.7bn. The federal budget went from a modest ($0.2bn) surplus to a huge ($2.2bn) deficit. This constituted the largest peacetime deficit to that date. Relative to a shrinking economy, the burden of government had increased significantly. The largest part of the increase was due to transfer payments such as loans to veterans. Public works expenditure and grants to state- and local-government also increased significantly.
The efforts to promote employment through public works, maintain wage rates, restrict immigration, and maintain prices for goods such as farm products continued, although some (such as maintenance of wage rates) were starting to show that Hoover could not hold back the tide.
In late 1931, the National Credit Corporation (NCC) was setup, with $500m of capital from the stronger banks and access to $1bn of funds from the Fed. The insurance companies were forced not to foreclose on defaulting mortgages, and the NCC was used to prop up weak banks by rediscounting their assets.
In 1932, Hoover went further, promoting a program including:
- Establishment of a Reconstruction Finance Corporation (RFC), using Treasury funds to lend to banks, industries, agricultural credit agencies and local governments - it lent $2.3bn during 1932;
- Broadening access for discounting at the Fed;
- Creating a Home Loan Bank (a sort of proto-Fannie Mae and Freddie Mac)
- Continuing and strengthening the existing interventionist policies on prices, wages, jobs, immigration, etc.
- Weakening protection for creditors under bankruptcy laws.
Hoover hadn't shrunk the government and he had to try to contain the growth in the deficit, so he decided to put up taxes, including to income, corporation, excise, sales and estate taxes. Other government charges, such as postal rates, were also increased.
Despite the tax increases, revenues fell, by $0.9bn. Federal expenditure also fell, by $1bn to $3.4bn, mainly due to a massive cut in transfer payments (veterans' loans) and grants to state- and local-government. State- and local-government expenditure fell by $0.9bn, because they could not raise the funds to continue with the public-works programs. GNP fell more precipitously, from $76.3bn to $58.5bn, so despite the falls in expenditure, thanks to the continued efforts and increased taxes, government's share of national income increased again.
Hoover also tried to inflate his way out of trouble in 1932. The Fed bought $660m of government securities, which would have increased money supply by around $8bn, if withdrawals, the emergence of excess reserves and so on hadn't exceeded the cash-injection and resulted in money supply falling by $3.5bn. There was considerable public and academic agitation in favour of reflation and against those (not the government) who were perceived as frustrating the policy.
This history substantiates Hoover's claims during the re-election campaign of early 1933 to have been extremely activist in his attempts to tackle the depression, and far from laissez-faire. And yet, despite (or more accurately, because of) these efforts, industrial production and GNP had fallen by half, and unemployment had risen to 25% and stayed there.
The record gives the lie to the common accusation that Hoover pursued a laissez-faire policy that made the Depression worse than it need have been, and that it was Roosevelt's introduction of interventionist policies that started the recovery. The policies pursued before and after the election were very similar in nature and degree.
If it clearly wasn't Roosevelt's interventionism that caused an upturn, what was it? Rothbard points out that the Fed's inflationary policy only ran for the first half of 1932, which was when the money-supply contraction of that year also occurred, as withdrawals etc continued to exceed Fed injections. In the second half of the year, when the Fed gave up on inflating the economy, the flow reversed, gold and money reserves increased, and so did the money supply. So it was the abandonment of financial interventionism that caused the stabilization of the financial system, which provided the basis for the subsequent recovery. Roosevelt's interventionism was primarily responsible for inhibiting this recovery, for instance by preserving real wages at a level that saw unemployment still at over 20% by the start of the war.