The return of depression misconceptions

In the wake of the Great Recession of 2008, innumerable comparisons have been drawn between the current state of affairs and the Great Depression of the 1930s. Their causes, their courses of development and their outcomes have been compared and contrasted, with the resultant analyses used to support all sorts of contradictory interpretations and policy prescriptions.

One of the most popular variants of this Recession-Depression juxtaposition has been used as an indictment of free markets and voluntary individual economic action. According to this line of analysis, the ostensibly free market policies of Herbert Hoover amplified the effects of the stock market crash of 1929, and necessitated a decade of unprecedented action on the part of Franklin Roosevelt’s New Deal government in order to restore order to the economy. Along those lines, Paul Krugman—a Nobel Prize-winning economist, an editorialist for The New York Times and an enthusiastic proponent of this version of history—interestingly indicted what he sees as the current president’s “expansionary austerity” by referring to him as “Barack Herbert Hoover Obama.” (I imagine that the president would find accusations of “laissez-faire capitalism,” grossly misguided though they may be, a refreshing change of pace from the usual slurs of “socialism” he often finds hurled his way.)

If it’s true that Herbert Hoover was some sort of free market ideologue, then we would expect to find some evidence of that in the man’s speeches. Far from it, however, Hoover’s speeches reveal a position that, if anything, reads more like the antithesis of free market economics. “We might have done nothing,” he said of the 1929 crash in an August 1932 speech. “That would have been utter ruin. Instead we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.” Similarly, in a second speech just several months later, Hoover directly attacked those who had warned against intervention. “Some of the reactionary economists urged that we should allow the liquidation to take its course until it had found its own bottom. … We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.” A free market ideologue, indeed.

Those who doubt Hoover’s record of interference in the economic affairs of our nation, and who see Franklin Roosevelt’s New Deal as a departure from a Hoover administration inclined toward laissez-faire, are free to consult the words of Rexford Tugwell, a member of FDR’s Brain Trust and one of the architects of the New Deal. “The ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under Herbert Hoover’s aegis,” Tugwell said. “We all of us owed much to Hoover.” Elsewhere, Tugwell confessed, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”

It seems as though neither the Hoover nor the Roosevelt administration saw Herbert Hoover as the sort of free market ideologue that people like Paul Krugman make him out to be. (In fact, part of Roosevelt’s strategy in his 1932 presidential campaign against Hoover was to paint Hoover as a reckless spendthrift, indicting the incumbent for his “orgy of inflation.”) But how much does this really prove? Isn’t it still possible, after all, that Hoover, Tugwell and Roosevelt all misread the situation, and that some good old modern day revisionism has set the record straight?

I suppose it’s possible, but it’s not very likely. A quick look at Hoover’s economic policies reveals him to be an interventionist with a firm belief in the power of the government to reverse the tides of disturbance that were bubbling through the economy during his administration. Indeed, as Murray Rothbard detailed in “America’s Great Depression,” “If we define ‘New Deal’ as an antidepression program marked by extensive governmental economic planning and intervention—including bolstering of wage rates and prices, expansion of credit, propping up of weak firms and increased government spending (e.g., subsidies to unemployment and public works)—Herbert Clark Hoover must be considered the founder of the New Deal in America.”

Despite the many state interventions that occurred under Hoover, however, some still cling to the belief that he harbored a free market fundamentalism that serves as a convenient explanation for the severity of the Great Depression. The aforementioned Krugman, for instance, cries “austerity” on the basis of some murky numbers, dubbing Hoover’s budget reduction of $63 million—a mere 1.3 percent of the budget of the prior year—as the “fiscal mistake of 1932” and arguing that Hoover was “slashing spending … at the expense … of the nation’s economic future.” As economist Robert Murphy points out, though, Krugman’s sloppy analysis here fails to assess federal spending under the Hoover administration as a percentage of GDP—a more accurate indicator of relative federal expenditure in an imploding economy. In fact, deficit as a share of GDP rose each and every year that Hoover was in office.

Of course, this historically uninformed portrait of Herbert Hoover as a champion of free markets is just one aspect of the historical ignorance embodied in today’s doctrine of federal interventionism. After all, if it were true that free markets cause recessions and powerful federal governments fix them, then we would have expected the Panics of 1819 and 1921—which were met with little government action—to have utterly devastated the nation, and those of 1929 and 2008—which were greeted with heavy doses of federal intervention—to have quickly dissolved. History, in fact, has shown us quite the opposite.