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Will the Real Herbert Hoover Please Stand Up?
With every financial crisis, real or imagined, there comes the obligatory references to Herbert Hoover. As the conventional narrative goes, it was Hoover's laissez faire inaction in response to the 1929 stock market crash that brought about the Great Depression. With the current economic meltdown on Wall Street and the spate of failed banks, the Great Depression is being invoked again. As Congress debates a government bailout of the financial markets, those advocating a more free market response are predictably being compared to Hoover. It's not considered a compliment.
As is often the case, however, the conventional narrative departs from the truth, and while the Hooverian response does resemble the platform of one of the candidates for the Presidency, it might surprise a lot of people which candidate that is. Hoover, far from the caricature, was not the free market, limited government advocate; rather, he fit in with the progressives of his day, seeing government as a tool for shaping a better world.
When Hoover took office, the top marginal income tax rate was 25%. The top bracket started at an annual salary of $100,000 — quite a sum at that time. Hoover's response to the building economic crisis was to raise taxes. Only on the "rich" of course. President Hoover dispatched his Treasury Secretary, Andrew Mellon, to Congress to lobby for an increase in the top tax rate from 25% to 63% on those making over $1,000,000 per year. He was successful: Congress granted his request, and the tax increase was enacted. Taxes were also increased on estates (today known as the "death tax" by opponents) and corporations. Secretary Mellon, who was reluctant to request the increase and later lamented it, was later chastised as one of the greedy capitalists, "economic royalists" in Roosevelt's vernacular, responsible for the depression.
President Hoover also sought to shore up the economy by protecting American businesses, particularly farmers, from overseas competition. He pressed Congress to pass the Smoot-Hawley Tariff Act, which raised tariffs on nearly every sector to historically high rates. As predicted in a letter written to President Hoover by 1,028 economists urging him to veto the act, enactment of the new tariffs spurred reprisals from other countries, resulting in a worldwide slowdown in trade and commerce.
So the Hoover approach to a "credit crunch", bank closures, and a crisis on Wall Street was to raise taxes on corporations and "the rich", and to increase tariffs on imported goods and services. Sound familiar? It should: it's the platform of Senator Barack Obama. Will the real Herbert Hoover please stand up?
As is often the case, however, the conventional narrative departs from the truth, and while the Hooverian response does resemble the platform of one of the candidates for the Presidency, it might surprise a lot of people which candidate that is. Hoover, far from the caricature, was not the free market, limited government advocate; rather, he fit in with the progressives of his day, seeing government as a tool for shaping a better world.
When Hoover took office, the top marginal income tax rate was 25%. The top bracket started at an annual salary of $100,000 — quite a sum at that time. Hoover's response to the building economic crisis was to raise taxes. Only on the "rich" of course. President Hoover dispatched his Treasury Secretary, Andrew Mellon, to Congress to lobby for an increase in the top tax rate from 25% to 63% on those making over $1,000,000 per year. He was successful: Congress granted his request, and the tax increase was enacted. Taxes were also increased on estates (today known as the "death tax" by opponents) and corporations. Secretary Mellon, who was reluctant to request the increase and later lamented it, was later chastised as one of the greedy capitalists, "economic royalists" in Roosevelt's vernacular, responsible for the depression.
President Hoover also sought to shore up the economy by protecting American businesses, particularly farmers, from overseas competition. He pressed Congress to pass the Smoot-Hawley Tariff Act, which raised tariffs on nearly every sector to historically high rates. As predicted in a letter written to President Hoover by 1,028 economists urging him to veto the act, enactment of the new tariffs spurred reprisals from other countries, resulting in a worldwide slowdown in trade and commerce.
So the Hoover approach to a "credit crunch", bank closures, and a crisis on Wall Street was to raise taxes on corporations and "the rich", and to increase tariffs on imported goods and services. Sound familiar? It should: it's the platform of Senator Barack Obama. Will the real Herbert Hoover please stand up?
Before Americans take up the banners of Robespierre and Morat and start sending the Wall Street Financiers to the guillotine, there are much more important things to consider...
The productivity of the American worker and Americans is a source of strength. This productivity needs to be the focus of economic policy rather than support of archaic financial methods. Productivity in the United States has increased year by year and decade by decade. This has occurred because of a strong work ethic, industrialization, computerization and general modernization. The riddle becomes, that, with all of the productivity improvements, why do we have to work harder than ever before? When all of the productivity increases then, as a society, we should have to work less hard, not more. We are more efficient, so there should be more to eat, more to enjoy.
What has happened is that the increases in productivity often leave society in more debt. Typically borrowing is done to produce a new good or service. However, if unadjusted, there are more goods and services than the sum of money and credit. This causes deflationary prices and economic contractions (depressions).
The chairmen of the Federal Reserve, Alan Greenspan and Ben Bernanke, have primarily addressed the threat of economic contractions and crises by loosening credit. The tech bubble of 1999-2000 was resolved by looser credit and growth in construction (lately resulting in the current bubble). New technologies were brought to us in the 1990's, and we were the beneficiaries of new construction in the 2000's. How wonderful! Society has more goods and services. But the productivity was largely balanced by credit and not money. Bernanke is continuing to play the credit game (adding credit to try and maintain economic growth).
The cost of the credit game is risk, cyclicality and unused productivity gains by the general public. The risk and cyclical nature occurs because sometimes increased credit is available, sometimes it is not, and sometimes it shrinks due to market conditions more related to confidence and emotion (markets are almost always emotional). The Fed is usually able to reduce this cyclicality by loosening credit or tightening it. Currently the loose credit of the fed is being overwhelmed by the confidence and emotion problem. Credit and finance need public and business confidence. That need is another weakness in the classical credit and financial model. A stable model should not have to rely on emotion.
As the alternative. there are also risks with primarily balancing the productivity with money, that is, increasing the supply of money rather than increasing the supply of credit.
However, adding money in a deflationary economy (or deflationary sectors) stabilizes the value of money. The challenge now is to poke out some of the credit with money so the purchasing and investment power remains on par. After that, new money can be a ratio of productivity.
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Yes - Herbert Hoover, bless his heart, was a progressive. One of his biographies calls him "The Forgotten Progressive." If ever there was a president misunderstood by popular history, it is Herbert Hoover.
Lord knows he made mistakes. When it came to being an activist president, he didn't have good models to work from.
It's my take that he was anticipating FDR's dictum:
"It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something." That's what Hoover did.
Several times during the recent financial flap, people have mentioned FDR's "Reconstruction Finance Corporation" as a model of how things might be done. Interestingly enough, the RFC was started during Hoover's term, and inherited by FDR.
In the 1932 campaign, commentators noted that Hoover and FDR were speaking each other's lines. Hoover pushed his brand of activism as the banking system collapsed. FDR pushed reducing taxes and balancing the budget.
When FDR won, he started out balancing the budget, as promised. Unfortunately, he discovered that, if anything, it made things worse. So he began imitating Hoover. When one thing didn't work, he tried something else.
In the end, what Hoover had started, FDR largely increased. Hoover often kvetched from the sidelines that FDR was going too far. FDR felt that he had to, because it was what seemed to be working.
So how does this apply to the current election. Obama appears to see himself more as a disciple of FDR than of Hoover. FDR became Hoover on steroids. And is credited in popular history with pulling the country out of Hoover's depression.
The foregoing leads me to wonder how apt Dave's analogy is. I agree with a lot of what Dave says about Hoover and the fact that he failed. But it's not clear that the subsequent history takes Dave's analogy in the direction he'd like it to go. The campaigning McCain sounds a lot like the campaigning FDR - and look where *that* ended up. In this case, McCain may be emulating the "wrong" Roosevelt.
I've always felt that the disparity between people's impressions of Hoover and FDR may have had more to do with their radio voices and their public personnae. Hoover came off as stiff and straight-laced. FDR was more publicly voluble, and got along particularly well with the press. Again, sounds like McCain - at least until his handlers decided to sequester him.
All this is to note that on close examination, analogies like Dave's often don't hold up well. Dave criticizes the Progressive Hoover, but says less about what he should have done. Given Roosevelt's early experience, it's not clear that reducing government spending and taxes and pulling back Hoover's programs could have helped. So, what "should" Hoover have done?
Hoover is one of my heroes by the way. Not for his presidency, but for so many other amazing things he did. He's an exemplary American. We could use many more like him.
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Hoover actually reduced taxes during the early days of his Presidency. Only when the economic conditions of the country were in really sad shape did he come back and reinstate the tax system alluded to in this note. He did so with Congress's approval. The same will happen in our reality if we are not careful.
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