Blaming Hoover (for Helping Workers)

New York Times ^ | August 31, 2009 | Floyd Norris

[reaganaut1]

What caused the Great Depression?

There are plenty of theories and arguments out there, and I don’t plan to review them. But a new one (at least new to me) is contained in a paper by Lee Ohanian, a U.C.L.A. economist, that was released today by the National Bureau of Economic Research.

He blames Herbert Hoover. That is not exactly original; the Democrats ran against Hoover for a generation after he left office, much as some would now like to run against George W. Bush. But his criticism is that Hoover was too kind to workers, which is not exactly conventional wisdom.

Here is his summary:

I develop a theory of labor market failure for the Great Depression based on Hoover’s industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.

So if business had been free to slash wages, everything would have worked out just fine. He blames both Hoover and Franklin Roosevelt for legislation that “raised wages well above competitive levels.”

Many have seen the Great Depression as a failure of capitalism, and see the current financial crisis as another one. I, and many others, have argued that the current mess shows the need for much better and much more comprehensive regulation. With Hy Minsky, I think that financial stability breeds overconfidence and thus instability, and that markets can fail badly in such circumstances.

[reaganaut1]

The NYT business "chief financial correspondent" seems genuninely shocked by the idea that government efforts to keep wages artificially high cause high unemployment and an extended depression. You can't help workers in the long run by bankrupting their employers. (Well, you can have taxpayers honor their contracts, as in GM, but that cannot be generalized to the whole economy.)

I have not yet read Amity Shlaes book on the Great Depression, "The Forgotten Man", but I'd be surprised if she has not made a similar argument.

If the Democrats' policies have the same policy this time, he'll be shocked again.

[FromLori]

When Obama was elected, many compared him to a modern day FDR. See this Time Magazine cover, for example.

On the other hand, financial writer Ed Harrison has called Obama a “black Herbert Hoover”.

Who is right?

It is true that Hoover - like Obama - did not force any meaningful change or reform to the banking or financial system. See this, this and this.

It is true that Hoover - like Obama -appointed as his top economic advisers banking insiders.

It is true that Hoover - like Obama - is trying to paper over the crash with happy talk.

But - unlike Hoover - Team Obama has printed tens of trillions of dollars and - instead of giving the money to consumers or the real economy - is throwing the money at the biggest banks.

And - unlike Hoover - Team Obama is massively manipulating the markets in so many ways that it is impossible to keep track.

The Obama economic team is destroying the real economy in order to prop up the financial giants. They are indebting the country and burying us under a moutain of debt, manipulating the markets and using happy talk to try to prop up a corrupt and fraudulent system which has stolen all of the poker chips.

Obama’s actions prove that he is not only not a new FDR, he is actually worse than Herbert Hoover.

Race has nothing to do with it.

http://georgewashington2.blogspot.com/2009/08/obama-is-worse-than-herbert-hoover.html

[meandog]

Anyone ever hear of “Smoot-Hawley” as in Sen. Reed Smoot and Rep. Willis Hawley?

[raybbr]

I wish I was a cartoonist. I would draw a camel (representing America's businesses) out in the middle of the desert with union thugs riding on its back. Each one of them would have a "tap" into the camel's hump sucking water out of the camel as they wanted it. Each goon would be saying things like "the camel has more water than it needs", "just a little bit more water won't hurt", "the camel is greedy and doesn't need all that water", etc. (all the usual union stupidity)

Eventually the camel would die still miles from the nearest source of water. The idiots from the unions would be standing around wondering why the camel died and what they are supposed to do now that they are stuck out in the desert. One or two would be still yelling at the camel calling it greedy.

I wish I could draw...

[HuntsvilleTxVeteran]

In most magazines pre-depression, there were advertisements
about how to make money on the stock market.

The FRB had opened the spigot on loans to buy stock.
Than it closed the the spigot.
After it hit there were no more ads!

On TV and other Media outlets, there were many ads on how
to make money in real-estate.
And the FRB opened the spigot on real-estate loans,
It closed the spigot and started a new depression.

[Parmy]

I had the book loaned to me. Finally I had to give it back after reading about half. It made me so mad that I could only read a few pages at a time.

And these pukes want to do the same thing again, only more and bigger.

[decimon]

Hoover's pro-labor stance helped cause Great Depression, UCLA economist says

[Wildbill22]

I wonder if Hoover was a “compassionate conservative”?

[Wildbill22]

I know what you are going to say, but I voted for Bush. It is just what happens when a weak conservative runs against a strong liberal.

[UCFRoadWarrior]

What I find interesting in all this....

There is a current mind-set to blame the GOP (Hoover, Smoot-Hawley Tariff) for the Great Depression.

Note that these are the same liberals, and, faux-cons who support Liberal Free Trade Globalism.....they are the ones who bash the GOP of the 20’s and 30’s, but yet support all of FDRs Liberal Free Trade Globalist ideas (FDR, through the UN, is the father of GATT, WTO, modern free trade movement...FDR, the guy who liked his Uncle Joe [Stalin])

I get a kick out of all those who will bash FDR for his domestic policies.....yet are lock-step, goose-step with him on Free Trade Globalism. I did not there was a choice of flavors of Communism at the local Socialism Store

Hoover made some mistakes in handling the economy at this time, but, he inherited a huge mess that was festering for years. No matter what people think about Hoover....he was not FDR....FDR installed socialism in America....and Free Trade Globalism and Communism throughout the world.

[reaganaut1]

I support free trade. Who are you to tell me (through government edicts and tariffs) where I should buy things from?. It’s not your business.

[Wildbill22]

What I find interesting is that it looks likely that a strong liberal followed a weak conservative administration in both Obama’s and FDR’s case, which in turn led to socialistic heyday for the libs. What we need more than anything is a very strong conservative, but the likes or RR are few and far between.

[MosesKnows]

Anyone ever hear of “Smoot-Hawley” as in Sen. Reed Smoot and Rep. Willis Hawley?

Yes indeed, as do virtually all scholarly approaches to determine the cause of the world wide depression. The Hawley-Smoot Tariff Act of 1930 coupled with an increase in marginal tax rates caused America's depression, which rippled through out the word.

[DManA]

It’s amazing the weird positions the NYT can contort itself into to defend the indefensible. Now they’re DEFENDING Hoover. LOL.

[Mack the knife]

Yes indeed, as do virtually all scholarly approaches to determine the cause of the world wide depression. The Hawley-Smoot Tariff Act of 1930 coupled with an increase in marginal tax rates caused America’s depression, which rippled through out the word.

---

Not according to Milton Friedman. From 1918 to 1926 the FED increased the money supply by a factor of 3. They made a decision in 1926 to reduce the money supply by 1/3 by buying the bonds banks needed as reserves to make a loan -— and didn’t tell anyone. They continued to buy and destroy these bonds until 1936. So while the government was trying their best to “prime the pump”, the FED was sucking off all of the prime and then some.

So, at the wholesale level, farmers borrowed money for tractors in the late 20s, borrowed money for seed and fuel in the spring, and sold the harvest in the fall, and paid off their loans. Then one year they went to get their spring loan to plant, and the bank had no money to lend. And thus the people who sold seed and tractor fuel had to reduce staff. The farms that were left had high prices but were limited to low volume, so the transportation sector lost capacity and reduced staff. The ripples continued.

At the retail level, clothing stores borrowed money, bought clothing, sold it, paid off their notes, and asked for a new loan for the next set of clothing. The bank had no money to lend. And thus the people who made the clothing reduced staff, and the folks who made the cloth, and the folks that spun the cotton into thread, and the farmers who raised the cotton ... had no product to sell.

This time, the FED is opening the spigots, creating $45 billion in one week. We will have a different version of the above problem -— inflation when all that money comes home to roost.

[MosesKnows]

Not according to Milton Friedman

The statement I responded to was What caused the Great Depression? You are addressing the United States market crash and America's depression. The Great Depression refers to the world depression.

[Mack the knife]

The statement I responded to was What caused the Great Depression? You are addressing the United States market crash and America’s depression. The Great Depression refers to the world depression.

---

Sorry, let me elaborate my answer. Its just different parts of the same piece of cloth.

When the FED decided to start reducing the money supply in 1926, the stock market was rising dramatically. A bunch of folks in Europe decided they wanted to cash in, so they bought US stocks ... a lot of US stocks. Since the world was on the “gold standard”, eventually European central banks started sending gold to the US.

According to the gold standard, the total amount of money in circulation was supposed to be some multiple of the amount of gold in central bank vaults. So when the Europeans sent gold, they increased interest rates and reduced their money supply. The US, receiving the gold, was supposed to increase the money supply and reduce interest rates, so that money would be attracted back to Europe. The FED said, “Thank you for the gold”, sent it to Fort Knox, but they were going to correct their previous mistake, and continued to reduce the US money supply (not increase it as the gold standard required). End Result: Europe started into a recession (because loans were not being made, because their gold supply had been reduced) starting in 1926, which deepened by 1928.

Thus the FED not only caused the depression in the US, they exported the depression to Europe 2 years before it occurred in the US because of their policies.

All of this was well in place before Smoot-Hawley was even a gleam in the politician’s eyes.

I believe that this was an inevitable consequence of:
1) the world being on the gold standard; and
2) FED increasing the money supply beyond that allowed under the gold standard.
3) the FED decision to reduce their money supply without fessing up.

Of course, if the US Politicians hadn’t decided to “help” with inappropriate legislation, things would have cleared up a lot more quickly. Rothbard dissected those issues exhaustively.