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Hoovernomics Revisited

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Herbert Hoover is recognized as one of the worst presidents in American history. The historical depiction of his non-handling of the Great Depression is legendary. We have all been taught that he was a do-nothing executive who let the country’s economy fall apart at his feet. Further, if Franklin Roosevelt had not thumped him in the presidential election of 1932 the United States would have eventually been reduced to a fifth world cesspool. This historical account taught to millions of American public school students each year cannot be farther from the truth. In fact, Hoover’s activist policies during the Great Depression are the real reason he was a horrible president and it’s a shame our current leaders learned nothing from his folly during the early 1930s.

The goal of Hoover’s economic policies after the onset of depression was to re-inflate prices back to pre-depression levels. He sought to achieve this through two mechanisms – government spending and credit expansion. Sound familiar? First of all, he instituted a federally financed program of public works. The concept was supposed to put money in peoples’ pockets so they could spend their way to recovery. By 1932, this scheme nearly doubled federal construction projects from 1929 levels. The program was very expensive by 1930s standards – $1200 per aided family. The biggest problem with federal public works, as far as Hoover was concerned, was that the program was unavailable to those hurting in remote parts of the country and to those folks unable to perform such labor. Of course, the real problem, economically speaking, with makework schemes, is that they do not work in stimulating a beaten down economy.

Instead of continuing the failing program, his administration switched to increasing federal relief aid to the states so they could carry out projects that would aid displaced workers. The increase in aid was phenomenal in such a short period of time. In 1929, aid to the states totaled $33 million. By 1931, the figure rose to $173 million. By 1932, aid was $308 million, which represented an astronomical amount at the time.

Then there was Hoover’s Reconstruction Finance Corporation (RFC) which was approved by Congress in 1932. In that year, the RFC made $2.3 billion in loans to banks, railroads, and farmers. Most of the money went to paying off debts, supposedly to ensure the solvency of the credit markets. Still more money flowed from the RFC to the states to further finance makework schemes. In addition, $25 million was allocated to the Treasury Department so it could invest in the stock of the 12 newly created Federal Home Loan Banks.

It was the Federal Home Loan Bank Act (FHLBA) which showed the enormous interest Hoover had in interfering in the market in a way that no previous administration ever had. He wanted ultimately to build a huge mortgage discount banking system that included all financial institutions in America. He wanted mortgages to be discounted by these institutions up to 80 percent of the value. Thwarted in his efforts, he settled for a system that forced building and loan associations to discount mortgages to 50 percent of value.

So, contrary to popular belief, Herbert Hoover, for his time period, was a radical government spender and interventionist in the economy. Indeed, this article has only represented a few of the more egregious measures of his administration. Without question, Roosevelt’s New Deal was much larger and more comprehensive a program. But, what is important to understand is that both Hoover and Roosevelt’s policies are what put the “Great” in Great Depression by prolonging the recovery by about 15 years. The increased government spending of the time, like this year’s stimulus package, did nothing to spur recovery. The expansion of credit through the RFC and FHLBA was as effective as current Fed and Administration policies will be in restoring faith in the banks and getting the economy moving again. Tighten your belts, because If Bush is our Hoover and Obama is going to be our Roosevelt, then we are in for many years of economic despair.

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About Kenn Jacobine

  • http://drdreadful.blogspot.com Dr Dreadful

    Somehow I doubt that doing nothing is going to help much either.

  • lLumpy

    very enlightening. good job.

  • http://www.republicofdave.com Dave Nalle

    Kenn, you sound a warning here which I think we would all be wise to heed. In the immediacy of the current fast-flowing events no one seems to be paying attention to the larger picture or to the lessons of history, and that could prove a serious mistake.

    As people did with Roosevelt, there seems to be an urge to reach out for whoever makes the biggest and most impossible promises – the glib talker with the easy lies. Socialism is like a drug to which people become addicted. Then they want more and more of it, regardless of the harm which it does to them.

    Dave

  • troll

    while the 20s roared for the investor/owner class it was a decade of set backs for labor which had had its back broken by WWI…by ’29 under the lazy unfair policies of Harding/Coolidge wages had been depressed and poverty was rampant despite a low measured unemployment rate and blissful overproduction

    consumption dropped off in ’28 and on top of the already extreme poverty employment collapsed in ’29 jumping from 3.2% to 15.9% in the first two years of Hoover’s administration and to about 24% by the time he left office

    ignoring the history of labor and the common man the author mistakenly comes to the conclusion that had Hoover/Roosevelt not abandoned laissez-faire policies the Depression would have been shortened by 15 years

    but had such policies continued the more likely result would have been the violent end for the capitalist class and its government in the late 30s

    instead their ‘socialist’ (here read ‘fascist’) policies were able stimulate GDP and ensure enough employment to keep things patched together until WWII could eat up excess labor

  • troll

    …”employment collapsed in ’29 and unemployment jumped from 3.2% to 15.9%”…sorry

  • Kenn Jacobine

    Sorry Troll, but you are grossly incorrect. The various other “depressions” the U.S. experienced in her history before the Hoover/Roosevelt Depression were all short lived because there was very limited government interventions in them. Also, the Fed did not exist during those times.

    I would not say that the Great Depression was caused by capitalism, since a central economic planning agency (the Fed) caused it. Wasn’t/isn’t it the Fed’s role to prevent severe economic downturns. It did a great job then as now. This current, soon to be depression (also caused by the Fed), will vindicate those of us who believe government intervention is the root of all evil when it comes to fixing recessions. I obviously don’t wish us bad, but it is already too late – the depression is coming because of the lamebrain policies of Bush, Paulson, Bernanke, and the Congress to try to jumpstart the economy.

  • troll

    Ken – your #6 is both non-responsive and counter-factual

    while I think that you 15 year claim is pure speculation – my speculation in #5 is that people would not have put up with the poverty that laissez-faire policy had dumped on them long enough for the system to ‘right’ itself

    as for matters of fact: you base your claims on the ‘fact’ that The various other “depressions” the U.S. experienced in her history before the Hoover/Roosevelt Depression were all short lived…

    but how are you defining ‘short lived’ – ?

    …here’s a list of major contractions affecting the US

    lengths in yrs of those prior to the 10 yr Great one = 3 – 7 – 5 – 6 – 3 – 6 – 23 – 3 – 1 – 3

  • http://www.republicofdave.com Dave Nalle

    The biggest error in Ken’s comment, which he skirted by in his actual article is the fallacy that the Federal Reserve caused the depression. It’s a fantasy of the extreme right that the Federal Reserve played that role in the 1929 crash, based on looking backwards and assuming that current Fed policies were active in 1929, which was not the case.

    While there was a credit crisis in 1929 it was caused not by fed policies, but by falling land values resulting from ecological disasters and by bad mortgages in which the Fed played no role, and by overextension of personal credit from private banks. What was not a factor was inflation of the monetary supply, which is the main factor in the current situation where the Fed played a role.

    There are fundamental differences between the current crisis and 1929. The mortgage crisis is actually fairly minor compared to 1929, because although mortgage credit is overextended, the real values of real estate has not declined all that much on a nationwide basis. In 1929 property became nearly worthless. Today we have less than a 15% drop in value nationwide. One of the biggest factors in 1929 was massive industrial overproduction and a contraction of world markets. We’re largely insulated from that problem today because our economy has evolved away from relying solely on agriculture and heavy industry. We’re more diverse and the world market for our services and products has not contracted in the enormous way which it did in 1929.

    IMO there is a great deal of overreaction and irrational panic at play here. We’re genuinely looking at an adjustment and recessional period, not a crash. It may be a very dramatic readjustment, but it’s doesn’t penetrate to the most fundamental levels in the economy.

    The danger in the current situation is overreaction which will make the situation worse. That’s really an argument for the most conservative government possible, because government meddling in the current situation is likely to just make things worse after a certain point, especially if it’s more of the same opportunistic policies of personal enrichment and expansion of government power which the democrats have followed in the past.

    Dave

  • Heloise

    Dave: “IMO there is a great deal of overreaction and irrational panic at play here.” Hmm, that statement sounds like your piece on the Todd scam.

    Dave is no fear monger, he has no criminal record (that we know of), but his take on politics is a crime!!! Dave meet John, McCain that is:

    John McCain on “Meet The Press” spreading the lies around. He said Obama started off “in the left hand lane.” Yeah, when McCain first started driving there were NO lanes or stop lights as invented by an African American.

    McCain we will miss the laughs, but not you.

    Heloise

  • Kenn Jacobine

    Troll, Nice try. The numbers you supply prove my point alone. The Hoover/Roosevelt Depression lasted at least 30% longer than the longest downturn to that point. Even in the 23 year recession, industial production was up and people were not jumping out of windows.

    Additionally, most if not all of these crisis were caused by government action – war, central banking, Embargo Act of 1807.

    Dave, The Fed did cause the depression through easy credit. This caused misallocations in production – too many goods, and was epitomized by margin buying of stock. After the crash, the Fed raised rates – like taking drugs from an addict. The Fed caused our current crisis with low rates 1% in the early 2000s and then it raised rates to 5% by 2005. Again, causing misallocations in the economy (housing) and then by raising rates taking the drink from the drunk. The point is that the Fed has a shakey record at best when it comes to regulating the money supply to prevent downturns and bubbles.

    The current situation is not an overreaction. We are leveraged out the wazoo. Mountains of debt which most Americans thought didn’t matter is now coming home to roost. And Washington’s response is more debt.

  • pablo

    Dave comment 8 you said:

    “IMO”

    I almost fell out of my friggin chair! I never knew you to have opinions bub–[Personal attack deleted by Comments Editor], I had been under the assumption that you were the end all and be all of knowledge. Have you been taking humility lessons lately [Personal attack deleted by Comments Editor]?

  • jamminsue

    Dave: You say:

    “While there was a credit crisis in 1929 it was caused not by fed policies, but by falling land values resulting from ecological disasters and by bad mortgages in which the Fed played no role, and by overextension of personal credit from private banks. What was not a factor was inflation of the monetary supply, which is the main factor in the current situation where the Fed played a role.”

    You are so right! Here is a time when a fact is presented that you, a conservative, and me, a liberal agree on. The ecological disaster was the long drought called the Dust Bowl, that destroyed agriculture in the Midwest. Not only did land costs (the midwest farms) decline, but there were crop losses which translates into food shortages. That means inflation, such a lovely thing to have when markest are skittish. Many farmers pulled up stakes and went west (Grapes of Wrath). As I belive I have mentioned before, my Mother In Law was living on a farm in North Dakota and remembers the devvastation. Her family moved to Montana to start a new farm, with an older son working on the railroad, providing the necessary cash to make ends meet.

    Wasn’t the farm loan program a huge part of the primary cash engine before 1929? I don’t know. I think, from things I have read, there was huge unsecured speculation going on.

    The current market situation follows in that the basis for the cash engine (real estate) has devalued, but not for the same reason as 1929.

    The opinions on why real estate has devalued changes with one’s ideology, which is scarier to me than any other part of our current mess. Is the true source something unanswerable, or just so complex with all the interdependencies that it is difficult to determine? Can’t we put partisanship aside and try to cut through the rhetoric, find the fact nugget and determine a responsible, equitable solution?

  • http://www.republicofdave.com Dave Nalle

    The land speculation bust actually predated the outbreak of the depression by a number of years, starting in 1925. I’m intimately familiar with it because my great-grandfather was one of the major speculators busted by it. When the land speculation bubble burst no one from the government stepped in to bail him or any of his partners or anyone else out. And they eventually recovered. In fact, real estate values rebounded before the depression was over. Well, no one could bail him out since he killed himself.

    The current market situation follows in that the basis for the cash engine (real estate) has devalued, but not for the same reason as 1929.

    Also important is that so far our real estate bust has been pretty mild. It’s not even as bad as the bust in ’85. There are no signs that values are going to go down further. What we’re mainly seeing right now are people picking up bargains on foreclosures, and the inevitable translation of mortgaged homes into rental properties, and those are very healthy processes, really.

    As for butting heads over this issue, it comes not from trying to address the problems, but when we start talking about accountability. I’d like to see the people responsible in the government held accountable. The democrats would like to put all the blame on the business sector. The sad irony is that if Obama wins, then there won’t be any accountability for the people who really ought to get taken to the wall. There won’t even be hearings.

    Dave

  • http://ruvysroost.blogspot.com Ruvy

    As people did with Roosevelt, there seems to be an urge to reach out for whoever makes the biggest and most impossible promises – the glib talker with the easy lies. Socialism is like a drug to which people become addicted. Then they want more and more of it, regardless of the harm which it does to them.

    Roosevelt did not promise major facelifting changes in 1932 in his campaign. He excoriated the Hoover administration for inaction – but given conditions in 1932, a dog could have run against Hoover and won. Hoover was willing to act – but within such limited scope that he could not succeed.

    Hoover was not willing to make the changes needed in the States to try to correct the economy. One of the first would have been, in my opinion, to nationalize the Fed and put the hidden private bankers profiting over the depression out of business. But that is just Monday morning quarterbacking – 70 years later….

    As it was, it took war production – an actual legitimate reason to produce a product, in other words – to get America out of the Great Depression. Imagine if in 1929, it was the United States depending on foreign cash infusions as it does now. Just a reminder, boys and girls, the Weimar Republic was just in that position in 1929 – dependent on American capital infusion. Today, America is dependent on Chinese and Arab cash infusions….

    Oh, such delicious ironies.

    Ther truth is, Kenn – that nobody wants to hear the painful truth – NO government can save America from the economic hell it is about to go through.

  • http://drdreadful.blogspot.com Dr Dreadful

    Even in the 23 year recession […] people were not jumping out of windows.

    One of numerous myths about the Great Depression. Although the suicide rate did rise during the course of the Depression, the stories of brokers plummeting like human rain onto the sidewalks of Wall Street turn out to be nothing more than contemporary rumors.

    An interesting explanation here, both of the true facts and of why we want the myth to be true.

  • Franco

    #15 — Dr Dreadful

    Those myths are pretty common knowadge here in the US Doc and always have been. I think the link you provied shows the reason why forigeners possibly like yourself, might feel need to point it out in the UK maybe, but not in the US.

    The link states…..London newspapers gleefully told of pedestrians threading their way through the bodies of fallen speculators.

    If those are the myths in London I can see why you felt need to point this out, but no need to Americans. Chalk it up to one of those expereanice of learning to cross one of those 8 lane roads in Fresno by walking. How ever, thats not a myth, you got that one right.

  • bliffle

    Troll is right.

  • http://www.thekeekster.blogspot.com/ keekster

    Well, Bush and his administrtation has Hoover and his team beat in one regard, the Bush Gang caused our Recession! I do agree that if we are in the midst of history repeating itself, we are in for a bumpy ride.