Herbert Hoover’s New Deal

What we can learn from Hoover’s response to economic recession.

The Great Depression is one of the most misunderstood events in American history. The experience of the Depression and the actions taken by the Hoover and Roosevelt administrations are invoked up to this very day in discussions of economic policy. Its frequent use in public policy makes it not only an oft misunderstood event, but one of the most important events for Americans to understand. Many Americans simply have a false picture of the Depression. The worst distortion of historical fact contributing to this false picture is that in the wake of the Wall Street Crash in 1929, Herbert Hoover stubbornly sat back and did nothing to address the crisis for four years. His inaction is what turned a crash into the Great Depression. This could not be further from the truth. Hoover, rather than the laissez-faire ideologue he was supposed to be, was a committed economic interventionist and took unprecedented action to address the crash. Instead of letting the market sort itself out as many believed he did, Hoover launched a proto-New Deal that helped turn a temporary economic downturn into an economic depression lasting over a decade.

If you can, reach into the deep recesses of your mind and recall your U.S. history courses from high school. Remembering your lessons on the Great Depression, they probably went something like this: “The 1920s were a time of dog eat dog capitalism and by 1929 the greed that was consuming America could no longer sustain itself. When the stock market collapsed in 1929, Republican president Herbert Hoover, out of a commitment to rigid laissez-faire capitalism, refused to take action to help Americans which only caused the problem to spiral out of control. Americans suffered until luckily 4 years later Franklin Delano Roosevelt was elected president and launched the New Deal. This assortment of government programs gave people jobs, inspired hope and lifted America out of the Depression!”

There are many problems with this story. To begin with, the root cause of the Crash in 1929 does not lie in unfettered capitalism but the inflationary monetary policy pursued by the Federal Reserve throughout the twenties. Secondly, FDR’s New Deal did not lift America out of the Depression, but only prolonged economic troubles and actually caused a further recession in 1937–38. The third and biggest problem with this story is that Herbert Hoover sat back and did nothing in the aftermath of the stock market crash.

So why is this image we have received of Hoover so wrong? It is hard to say, especially when any brief study of the period immediately dispels this myth. Indeed, Hoover lays out in his own memoirs what actually transpired under his administration. He wrote, “we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.” Anyone who urged the traditional laissez-faire approach to the crash, which is to let the malinvestments in the economy liquidate and wages fall, were denounced by Hoover as “reactionary economists.” Instead of the traditional response, Hoover acted swiftly and in big ways.

A 1932 election pin for Hoover. “Speed recovery” did not mean sit back and do nothing!

He launched a 423 million dollar public buildings project, met with heads of nearly every industry and told them to hold wage rates constant as well as to continue production/expansion as usual. Hoover also encouraged greater spending by the federal government and state governments to keep the economy running and by 1930 public spending was at its highest level in years. All of these actions ignored the traditional economic teaching that spending should be lowered during a recession.

Hoover doubled the federal estate tax and raised the corporate tax rate by 15 percent, ignoring traditional economic advice to lower taxes during a recession. Along with these measures was the disastrous Smoot-Hawley Tariff which isolated the United States economically only making matters worse. Hoover did much more that is worth looking into (such as his vigorous enforcement of antitrust laws) but the previously mentioned actions went the furthest in creating full blown economic depression.

Hoover’s response to the crash in 1929 helped plunge the country into depression. Far from being inactive, the president did more than any administration before him when faced with a recession. Hoover ignored the teachings of sound economics and the history of his own government’s responses to previous recessions. Rather than lower taxes during an economic downturn, he raised them. Rather than lower spending and balance the budget during an economic downturn, he raised spending.

We should be thankful that Hoover’s advice was not heeded during the forgotten depression of 1920–21. At this time he was Secretary of Commerce under President Warren G. Harding. Unemployment had recently jumped to over 12 percent and GNP had fallen 17 percent, the situation looked dire and Hoover urged that intervention in the economy needed to be taken. Luckily, President Harding ignored Hoover and went the traditional route; taxes were slashed for all groups, federal spending was cut nearly in half, and the public debt was reduced by one-third. The result of all of this: you have likely never heard of the depression of 1920–21, because it turned out to be very short lived compared to the monster created under Hoover and made worse under Roosevelt.

The lesson to be learned from the Great Depression is the opposite of what we have often been told. In the face of economic busts and recessions the best thing a government can do is to get out of the way. Instead of pumping money into the economy, raising taxes, and starting massive public works programs, like Hoover did, the best course is to reduce public spending, slash taxes, and let the malinvestment that has caused the downturn to liquidate. Allowing malinvestments to liquidate allows the money that was previously used to fund unfruitful business ventures to find its way to where it is properly needed in the structure of production. Economic interventionists have long used the example of “do-nothing Hoover” to advocate for massive government programs to combat recessions, but as we have seen, no such Hoover ever existed!