Strong Fundamentals
Eric Rauchway reflects on Herbert Hoover’s October 25, 1929 proclamation that “The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis.”
Hoover worked to get businessmen to respond to the crisis by herding them into conferences and urging them to cooperate. He backed immigration restriction and a cut in the capital-gains tax. He quarreled with the unemployment figures from the Bureau of Labor Statistics. None of it worked, and yet Hoover insisted on the soundness of fundamentals, blaming the continuing crisis on whiners: “The income of a large part of our people is not reduced by the depression,” he said, “but is affected by unnecessary fears and pessimism.” He urged his fellow countrymen to count on “the magnificent working of the Federal Reserve system and the inherently sound condition of the banks.”
But the banks were not inherently sound; they depended on the unsound foundation of 1920s lending. After the crash, the president said the fundamentals were strong, but American consumers said, in effect, well, we’ll see, and their credit-driven buying slowed. Purchases of consumer durables in 1930 were about 20 percent lower than they were in 1929. Less purchasing meant less selling and more layoffs, which meant still less purchasing and soon more defaulting. The banks began to fail. Meanwhile, the “magnificent working of the Federal Reserve” did not stop the bank failures, which increased to sickening levels as Hoover’s term ground on and the reality of the Depression became undeniable.
Now of course to actually get down to the depths of the Depression required some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake. But there is an undeniable commonality to the off-the-shelf conservative policy prescriptions here.
46 Responses to “Strong Fundamentals”
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September 17th, 2008 at 9:19 am
This is totally unfair. Clearly, Herbert Hoover meant by “the fundamental business of the country…[is] sound” that “American Workers Are Strong.” Libruls. Hmf. Why do you think our workers are weak? We are Strong. Make Strong Economy. Workers Smash.
September 17th, 2008 at 9:29 am
The mistake that Hoover – and later FDR – both made was to raise taxes to very high levels in the teeth of the depression. Hoover couldn’t get past trying to balance the budget, and FDR couldn’t get past the idea of soaking the rich. Add in Smoot/Hawley, and it’s not a huge surprise that Europe escaped the depression long before the US. Had WWII not been on his watch, or had FDR left after 2 terms, he would be recalled in the same way as Hoover is – as a complete and utter failure.
September 17th, 2008 at 9:33 am
The commonality is that a financial crisis does not wipe out the underlying strength of a great economy — the skilled workers, intellectual capital, and plant and equipment that made the nation strong in the first place. Bubbles are caused by excessive credit; crashes by withdrawal of credit when the bubble becomes unsustainable. With sound monetary, fiscal and regulatory policy that allows markets to work, equilibrium is restored. The great risk is panic, which should never be promoted by opportunistic politicians.
September 17th, 2008 at 9:48 am
I heartily encourage all Republicans to run on the “FDR really just prolonged the Depression” line.
September 17th, 2008 at 9:48 am
I’m too busy to look up the exact quote and link, but Krugman said yesterday on the Olberman show that “Bernanke and Paulson know that we could end up with another Great Depression if we work hard enough — and I think Phil Gramm might be the man for that job.”
September 17th, 2008 at 10:06 am
The workers of this country aren’t “strong”. Whatever the hell that means. Relative to European workers, they’re under-educated, under-organized, over-worked, and under-paid. Maybe McCain meant that the workers in this country are “suckers”.
September 17th, 2008 at 10:11 am
>the depths of the Depression required some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake.
Man, Yg, you really need a sarcasm font; it took me a while to figure out you were being ironic.
September 17th, 2008 at 10:13 am
“….required some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake.”
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Yes, mistakes in the extreme are unlikely due to the system of checks and balances, judicial intervention and regulatory oversight we have in place. For instance, one man could not almost singlehandedly initiate a disasterous course of action that ultimately wasted in excess of a trillion dollars and cost thousands of American lives. Cooler heads, existing laws and opposing governmental institutions would override any attempt at such foolishness. Oh, wait………
September 17th, 2008 at 10:19 am
The last act of scoundrels is to loot the treasury.
September 17th, 2008 at 10:28 am
Yeah, but are they strong? You know, can they like, lift stuff?
September 17th, 2008 at 10:32 am
Matt, blaming Bush’s economic policies just makes you look like a partisan hack.
I’m not saying he’s free from blame but please, don’t pretend that Clinton and friends didn’t help create the problem either.
Enough on the subject has been written in the last few days that anyone well read on the topic knows you’re just trying to score cheap political points with the uninformed.
September 17th, 2008 at 10:35 am
Nonsense. This administration is fully capable of creating a depression, largely because their ignorance, neglect and greed. The coming economic disaster is a direct result of conservative policies.
September 17th, 2008 at 10:36 am
I read Rauchway’s article and it really is disheartening that a professor of history is either so ignorant or so dishonest that he can attempt to resurrect the “fiddled while Rome burned” caricature of Hoover after it has been so thoroughly exploded.(The forgotten man, amity shales. The roosevelt myth, john t. flynn. America’s great depression, murry n. rothbard)
As I pointed out to your fellow imbecile Ezra Klein, it was no less than Rex Tugwell who observed that “practically the whole New Deal was extrapolated from programs that Hoover started”.
This was not a piece of misplaced modesty on Tugwell’s part either. Every part of the new deal program was anticipated by the Hoover administration: taxes, borrowing, spending, public works. All of it.
September 17th, 2008 at 10:38 am
To me, it felt like a cheap shot because it focused on rhetoric, in search of McCain parallels. But FDR tried to sound upbeat, too. (The only thing we have to fear is fear itself.) The real question is whether you back up your rhetoric with action, and with what action. That’s where McCain’s deregulation mob takes you back to Hoover.
September 17th, 2008 at 10:43 am
Not only that, but Clinton was responsible for 9/11 too! And he believed that Iraq had weapons of mass destruction! And blowjobs! And and and…
Admit it, people. It’s all the fault of the Clenis. Always has been, always will be, world without end, amen.
September 17th, 2008 at 11:22 am
It is true that, unlike the current White House occupants, Herbert Hoover was a fundamentally decent man who actually believed his policies would work and had a history of beneficial interventions to improve the common good. And yes, many felt he was sadly trapped by a party ideology which favored a more limited government response and an excessive reliance on voluntary coordinated intervention.
So, yeah, this is more than the failure of one party; over the last 30 years, both parties have far to often followed the insane Republican mantra of conservative deregulation and an anti-regulation approach to governance.
September 17th, 2008 at 11:24 am
“…some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake.”
Even the smartest financial technocrats can, at best, know all about fighting the last war. This criticism, often made of military establishments, is actually an inescabable limitation that applies to the knowledge of any system, like our financial system, like our war-fighting system, complicated enough to even begin to mirror reality well. When you come down to it, and trace all knowledge back to its roots, we only know what we have observed, and we have only had a chance to observe tha last war, or the last depression.
Look at this another way. We put in defenses to deal with the last depression. But over time, some very smart people, arguably smarter than the technocrats we hope can resuce us, have gradually figured out how to systematically end-run these safeguards. The result is a “system” of regulated banks and unregulated shadow banks which is about as unlike the system that failed in 1929 as could be. And, because this “system” is the product of undermining designed specifically for lack of transparency in the unregulated component, it seems inescapable that technocrats trying to unravel the current mess won’t be able, in any simple or straighforward way, to use past experience as a basis for figuring out what will work this time. It is not obvious now, and won’t be obvious until after the present non-system shows us how it really works by deconstructing right in front of our eyes, what levers to press to save the current system from that self-destruction. The one thing you could probably bet on right now (I won’t say “take to the bank” because that doesn’t seem too prudent a course of action just now) is that the right levers that would have prevented the Great Depression are absolutely not the same ones that might prevent, or at least soften, this one we’re in now.
You’re right, no ine in comtemporary America would make the same blunders that led to the Great Depression. Unfortunately, it would take different blunders this time.
September 17th, 2008 at 11:32 am
No matter how many times Republicans and conservatives repeat the mantra, this is not a “no one could have anticipated” situation.
This has been screamed about most directly for the last 5 years or so, and the people I read screamed the same correct things about Phil Gramm’s deregulations (and Clinton’s signings of them) in 1999 and in 2000.
This is not some unanticipated crisis where we lack understanding of what we should have done — it’s where good people lacked the ability to make crazy ideologues do the right things.
September 17th, 2008 at 11:51 am
From The Great Crash 1929 by John Kenneth Galbraith…
“Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important- and, unhappily, on of the least understood-rites in American life. this is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practiced in our time. It is worth examining for a moment.
Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public mor productive or less painful than thinking in private. But there are a least as many reasons for meeting to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action…
The no-business meeting was an almost perfect instrument for the situation in which President Hoover found himself in the autumn of 1929. The modest tax cut apart, the President was clearly averse to any large-scale government action to counter the developing depression…
In recent times the no-business meeting at the White House-attended by governors, industrialists, representatives of business, labor, and agriculture-has become an established institution of government. Some device for simulating action, when action is impossible, is indispensable in a sound and functioning democracy. Mr. Hoover in 1929 was a pioneer in this field of public administration.
As the depression deepened, it was said that Mr. Hoover’s meetings had been a failure. This, obviously, reflects a very narrow view.”
September 17th, 2008 at 11:56 am
Years after the Great Depression started in (1930? 1931?), there is less consensus than ever about the underlying cause. Some say the Smoot-Hawley tariff, some say the ineptitude of the Federal Reserve in dealing with the crash, some say Hoover and the Republicans for their acceptance of laissez faire economics and the “self-correcting” version of capitalism. Some argued “sunspots.” Most people today would probably agree that Roosevelt’s prescriptions for the Depression helped ease the pain for many people but ultimately did not bring about the hoped for recovery. That took a total war and military Keynesianism which lifted the economy, the prosperity and the growth which we have enjoyed and taken for granted over the past 63 years.
There is plenty of blame to place on both Democrats and Republicans for the policies which brought us to the current state of affairs but it is undoubtedly the Republican party and its ideological right wing which has reinstated the myth of the “free market” which implies that market failure never happens or it is “self-correcting.” The market we have today would not exist but for a myriad of regulations and structures that legitimized the chimerical “financial products” which have poisoned the system. Whether the present market collapse can be reverse engineered and corrected by the government or any other institution remains to be seen. A lot ultimately may just depend on confidence and on Keynes’s “animal spirits.”
September 17th, 2008 at 12:04 pm
Yeah, but are they strong? You know, can they like, lift stuff?
Well, they used to be able to lift stuff, but that was before they threw their back out at work, and had to spent 3 years litigating their comp claim . . .
September 17th, 2008 at 12:05 pm
Goddam Clenis took my woman, now hes gone ta take my house! Darn you Stagger-Clenis, shot me over a Stetson hat.
September 17th, 2008 at 12:26 pm
When people get caught up with causation and the depression it becomes evident that they get blinded by the trees and can’t see the forest. Before the Crash, the U.S. was in a severe recession (one stretching back at least until 1925 and the agricultural crash and dustbowl). The stock market crash crushed the banks and made it almost impossible for them to provide the loans necessary for business to buy (stimulate) themselves out of the recession. The goal of the New Deal was not only to ease the current pain of the resulting poverty but to stimulate the economy that the financial system was too damaged to achieve. The depression lasted a full decade and it was only when the war took the final stops off government action.
September 17th, 2008 at 12:35 pm
Every part of the new deal program was anticipated by the Hoover administration: taxes, borrowing, spending, public works. All of it.
Reminds me of Gen. Grant taking over from Gen. Roscrans at Chattanooga:
On the morning of the 21st we took the train for the front, reaching Stevenson Alabama, after dark. Rosecrans was there on his way north. He came into my car and we held a brief interview, in which he described very clearly the situation at Chattanooga, and made some excellent suggestions as to what should be done. My only wonder was that he had not carried them out.
September 17th, 2008 at 12:59 pm
The current crisis is not just the consequence of poor regulatory oversight of the financial system. It also reveals the vast misallocation of resources in the economy that was the result of poorly run capital markets.
Too much was invested in residential housing, not enough in infrastructure. Math whizzes went into finance, not into fields like engineering where their skills would of made real differences in people’s lives. Huge salaries were lavished on people who made no real improvement in the material well-being of the nation. Federal money was wasted in the Middle East when it could of been spent on projects that would of had real pay offs.
And I don’t see any sign there will be a change.
September 17th, 2008 at 1:43 pm
Is Lou Dobbs the illegitimate grandchild of Herbert Hoover? That picture says yes.
September 17th, 2008 at 3:27 pm
>The last act of scoundrels is to loot the treasury.
The middle act of scoundrels is to loot the treasury.
And, the first act of scoundrels is to loot the treasury.
September 17th, 2008 at 3:36 pm
“Now of course to actually get down to the depths of the Depression required some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake”
How about massive airstrikes on Iran in the current environment? I think that might qualify, and you can’t rule it out with these guys.
September 17th, 2008 at 4:15 pm
El Cid: The conventional wisdom is that FDR was helpful, butt it’s very, very wrong. Should Republicans run on that? No, but that’s due to 70+ years of mythmaking
September 17th, 2008 at 4:33 pm
Some assertions are so jaw-dropping that they simply must be allowed to hang there, stinking, as an example of utter confusion:
Just … wow. Evidence to prove that remarkable assertion (snerk) would be very entertaining.
September 17th, 2008 at 5:25 pm
He wouldn’t want to post, say, GDP/GNP by year during the FDR administration, because it’s very, very clear that there was massive growth. The problem was starting from a thoroughly Bushed position.
September 17th, 2008 at 7:25 pm
“Hoover worked to get businessmen to respond to the crisis by herding them into conferences and urging them to cooperate.”
Where Hoover badgered employers into promising not to cut wages. Which led to massive, enduring unemployment, in contrast to the brief depression of 1920-21, where everything was cut and the economy got back on its feet fast.
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