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Source link: http://archive.mises.org/12847/did-hoover-really-slash-spending/

Did Hoover Really Slash Spending?

May 31, 2010 by

Today’s Keynesians love to point to history to “prove” the efficacy of their remedies. But if we just look at the facts, we see that the Keynesian narrative doesn’t add up. FULL ARTICLE by Robert P. Murphy


Bala May 31, 2010 at 10:36 am

A trillion (millions and billions are small change today :) ) thanks to Prof. Murphy. I’ve long wanted to see precisely this kind of analysis.

Le Master May 31, 2010 at 10:41 am

Bala, Murphy’s book on the depression is written in similar fashion. You ought to take a look at it if you haven’t had a chance to already.

Bala May 31, 2010 at 10:45 am

Thanks for the tip. I’ll sure lay my hands on it. Living in India does make it tough to get these books easily, quickly and at low cost. For instance, I paid twice as much as those living in the US to get a hardbound edition of Human Action. mises.org actually quoted $36 for the book and $103 for postage :) So, I got it through a friend of mine who runs an online bookstore based out of Chennai. I had to wait 1 full month on top of it. That said, it was still worth every rupee I paid. Going by that experience, I guess I will take your suggestion and buy Prof. Murphy’s book ASAP.

Jonathan Finegold Catalán May 31, 2010 at 12:48 pm

Mr. Murphy,

While I generally agree with your analysis, that Herbert Hoover was not a “defender” of laissez-faire and that the Federal Reserve did not tighten monetary policy, I think there are two points to make.

First, there is a major difference between the present recession and the Great Depression concerning monetary policy. As Rothbard details in America’s Great Depression, during the “great contraction” of 1929–32 there was a decrease in the money supply, because the Federal Reserve could not inflate faster than money was being withdrawn or outstanding debts were being liquidated. In our present recession, there has been an exponential increase in the supply of money, because the Federal Reserve does not have the same handicaps as that of the 1930s (including the bailouts).

So, if anything, an economist who does not agree with the credit theory of the business cycle can at least fall back on this empirical evidence. Monetary police has worked to curb the recession. Given, as Austrians we recognize that this only postpones the inevitable trend of liquidations which must occur for intertemporal discoordination to clear, but my point is that non-Austrians have this empirical evidence on their side (which makes this a comment on the inferiority of historicism and positivism).

Two, I am agreeing more and more with Daniel Kuehn that the Depression of 1920–21 does not vindicate Austrian criticism of Keynesian fiscal policy. Benjamin Anderson, in Economics and the Public Welfare, is clear that during the Depression of 1920–21 there was no lack of liquidity for investors. From a non-Keynesian perspective we can explain this by pointing to the lack of regime uncertainty, which was a factor during the Great Depression and a factor today in regards to investment (because, clearly there is no lack of liquidity today, either). This regime uncertainty is probably one of the major factors to the Keynesian liquidity trap (which they attribute to some mystical problem of monetary policy).

However, with no liquidity trap in the Depression of 1920–21, one cannot make the argument that that recession proves Keynesian fiscal policy wrong. Strictly speaking, Keynesians argue for strong fiscal policy only during liquidity traps, or where there is a lack of private investment. This was clearly not the case during the early 1920s, and so in the broadest sense Keynesians have not necessarily been proved wrong.

Jonathan M. Finegold Catalán

Matthew Swaringen May 31, 2010 at 2:19 pm

I think those are good points, and it’s likely that hardcore Keynesians are going to just say that Mr. Murphy is using a strawman and doesn’t understand their theory properly (the use of comparison to Reagan vs Hoover was actually a negative in that respect, because as you mention Keynesians are only for running fiscal deficits when in the effect of a liquidity trap).

Still, I think those who are not hardcore will see the fallacy in Krugmans argument on the clear evidence that we did not take strong austerity measures anytime during the 1930s. Keynesian theory has a lot of “common sense” working against it, and with the exception of “circular flow” most people probably don’t follow it that far. I don’t find many people who believe in “borrowing your way from poverty into prosperity” if you put it that way. Nor do people believe that printing more money makes for more wealth.

Jonathan Finegold Catalán May 31, 2010 at 3:59 pm

Mr. Swaringen,

It’s interesting to note that most Keynesians are probably coming around to the fact that Hoover did not follow laissez-faire economic doctrine. It’s well known that Hoover was an interventionist since his stint with war planning during the First World War. For a long time, the interpretation of Hoover’s policies during his presidency seemed to make him a hypocrite. But, recent scholarship has shown that Hoover’s presidency was a continuation of his interventionism. As a result, a lot of “saltwater” economists have began to blame Roosevelt for not being radical enough in his interventionism. In fact, an old economics professor of mine went as far as to claim that Roosevelt was laissez-faire (and the claim that Roosevelt, nearing the end of his presidency, began to give into what Krugman would call “freshwater” economics is also fairly popular. See: “Dangerous Lessons of 1937“).

Bala May 31, 2010 at 3:25 pm

Pardon my ignorance if I am actually displaying it, but IMHO, your criticism of Dr. Murphy’s attempt out here is a little misplaced. As I understand it (and I am pretty much of a layman when it comes to Economics) What Dr. Murphy is NOT doing is to

1. Use the economic and monetary data of the period from 1929 to 1932 to prove that Keynesian approaches to tackling a potential depression so not work

2. Use the case of the depression of 1920-21 to show that Keynesian principles do not have any substance.

My reading also tells me that what Dr. Murphy is trying to do is to show that

1. the economic and monetary data of the period from 1929-32 do not support the claim of Keynesians that it was the non-implementation of Keynesian policies that converted a garden variety recession into the Great Depression while the current implementation of Keynesian policies has prevented a recurrence of the Great Depression. He does this by showing that a number of key Keynesian policies were indeed followed in the most appropriate period of comparison of the current crisis with the Great Depression but that that did not prevent the onset of the Great Depression

2. the case of the 1920-21 Depression and the path of recovery followed then demonstrate that rapid economic recovery is possible in the absence of implementation of Keynesian policies. He is just trying to show that even the very opposite of Keynesian prescriptions was accompanied by a rapid economic recovery and hence that Keynesian principles are not the only road to economic recovery.

I would very much appreciate your response. Thanks in advance.

Jonathan Finegold Catalán May 31, 2010 at 3:51 pm


By referring to the Federal Reserve’s discount rate, Robert Murphy is in fact tackling the commonly made mistake of arguing that the Federal Reserve tightened its credit policy. From Krugman’s and Wells’s review, as quoted in Murphy’s article,

The obvious difference is policy: rather than emulating the grim austerity of policymakers three generations ago, who slashed spending in an effort to balance budgets and raised interest rates in an effort to preserve the gold standard, today’s leaders have been willing to run deficits and pump funds into the economy. (emphasis mine)

Robert Murphy goes on to argue that the Federal Reserve did in fact reduce key interest rates. With that, I completely agree. My comment only brings up the fact that there were impediments to the Federal Reserve’s ability to inflate the supply of money, and this was the fall in uncontrolled reserves.

Concerning the Depression of 1920, Robert Murphy writes,

In total contrast, in the depression of 1920–1921, the federal government and Federal Reserve really did implement the harsh measures that Krugman et al. erroneously attribute to Hoover and company. And yet, as its name suggests, this earlier depression was over quite quickly, and paved the way for the Roaring Twenties.

I’m simply commenting that there was no liquidity trap during that particular recession, and so a strict Keynesian wouldn’t argue for a loose fiscal policy (although Murphy is correct in his assessment of monetary policy).

To elucidate a bit more, you write,

2. the case of the 1920-21 Depression and the path of recovery followed then demonstrate that rapid economic recovery is possible in the absence of implementation of Keynesian policies.

Right, my comment suggests that bringing up Keynesian fiscal policy regarding the Depression of 1920 is irrelevant, because of the lack of a liquidity trap (in the Keynesian sense; I recognize the faulty logic behind the idea of a liquidity trap).

Finally, I’d argue that Robert Murphy would claim that Keynesian fiscal policy has absolutely no substance (as I would, as well). For reference, see his Freeman article, “The Depression You’ve Never Heard Of: 1920-1921“. My comment is simply an allusion to the point that the example of the Depression of 1920 as a way of disproving Keynesian theory about the Great Depression is not very strong, because of the Keynesian concept of the liquidity trap.

Bob Roddis June 1, 2010 at 10:24 am

What I take away from this analysis:

1. Keynesianism is based upon alleged “paradoxes” which logic suggests cannot be true (and are not true).

2. Keynesians then act as if they are the smartest people on earth because of their understanding of these paradoxical “truths”. Indeed, they refer to people who don’t agree as not understanding “economics”.

3. The alleged evidentiary proof of the efficacy of Keynesianism is FDR’s New Deal which allegedly solved the crisis caused by Hoover’s laissez faire and the Fed’s tight money.

4. One need not examine very many events nor categories of data within these events to know that #3 above is not true. The 1920-1921 depression was quickly cured by doing the exact opposite of what Keynesians prescribe. Hoover wasn’t laissez faire and the Hoover Fed tried very low interest rates. Roosevelt’s New Deal didn’t solve the depression, but dragged it out until 1946.

5. One is left with a Keynesian hypothesis that makes no logical sense whatsoever and is refuted with a simple examination of the facts and events upon which its adherents rely to “prove” their case.

6. The proponents of Keynesian theory are liars and frauds and their theory in practice is nothing more than institutionalized theft and fraud. No wonder these people will never engage in a fair and truthful debate with Rothbardians.

7. One should expect a significant “deflation” following a money dilution boom. The issuance of the diluted money as caused most everything to be artificially bid up. Thus, most everything must be re-priced based upon what living breathing human beings are willing to pay in the real world. Keynesian “stimulus” and “quantitative easing” (what a horrible misnomer) prevents the recovery by interfering with the necessary re-pricing.

Juraj May 31, 2010 at 12:48 pm

One only needs to read Murray Rothbard’s American’s Great Depression (which I have just finished) to find out what insane policies Hoover implemented. And yet, Rothbard points out that there were some other policies that Hoover refused because he found them to be too “aggressive”.

Jeremy May 31, 2010 at 3:24 pm

When comparing unemployment rates between the 30′s and today are all the smoke screens used by today’s government factored out?

What I mean is, does comparing a 25% unemployment rate in the 30′s to a 9% rate today take into account that they didn’t throw out underemployed and “discouraged” workers from the numbers back then?

If Shadowstats is to be trusted then today’s unemployment rate (if you used the same calculations they used in the 30′s) is easily comparable to what they faced then.

Jonathan Finegold Catalán May 31, 2010 at 4:01 pm


Robert Higgs shows that unemployment was measured similarly during the Great Depression. See: “Will the Real Rate of Unemployment Please Stand Up“.

Jeremy June 1, 2010 at 11:19 am

Thanks a lot. That really clears it up for me as I understood it the opposite way (as I posted it).

SirThinkALot May 31, 2010 at 4:14 pm

It’s also worth pointing out(and I think Murphy has covered this elsewhere) that the unusually high unemployment was largely caused by Hoovers ‘high wages’ policy(he went to major business leaders and asked them not to cut their employees wages) and the fact that, since we were still on the gold standard made it difficult for the Fed to inflate the money supply. Neither of these are issues today, so while we might not experence another ‘great’ depression, its very likely we’ll be facing a Japanese-style ‘lost decade’.

Brian May 31, 2010 at 4:28 pm

“…the unusually high unemployment was largely caused by Hoovers ‘high wages’ policy(he went to major business leaders and asked them not to cut their employees wages)”

I’ve never been happy with this explanation. No regulation was passed to keep wages from falling. It was done non-coercively. Voluntarily.

Matthew Swaringen May 31, 2010 at 7:37 pm

I don’t know if you could say there was no coercion behind the request. Certainly it was not legislated, but that doesn’t mean that there wasn’t threat of legislation or audits or what-not to keep them in line. With TARP, for example, there were banks that were strongly encouraged to take the money even if they didn’t need it, and then later had to pay it back even though they never wanted it.

I suppose they could have rejected the deal, but I imagine at least some carrots were held out to them to keep that policy going. Or maybe they did all do the wrong thing for their own interest and profit as well as for the unemployed voluntarily? It is possible.

The argument about bubbles/government intervention is one that is about primary causes I think more than about all possible causes. In the Mark Faber video posted recently he discusses that finding a huge cache of gold would cause the same type of bubbles as the printing press, just that the government is so much better at making bubbles. The same argument is made in regard to Spanish mercantalism as well in one of the Rothbard articles.

BioTube May 31, 2010 at 10:08 pm

It was mentioned in one of these posts that Hoover’s demand for high wages was backed by the threat of legislating them. So wages were high for much the same reason the Hays and Comic Codes were created: to preempt government meddling. It just didn’t work in the first case.

Ron Finch June 1, 2010 at 8:46 am

“In the Mark Faber video posted recently he discusses that finding a huge cache of gold would cause the same type of bubbles as the printing press, just that the government is so much better at making bubbles. The same argument is made in regard to Spanish mercantalism as well in one of the Rothbard articles.”

Mexican gold caused prices to rise, but it was not a bubble. All bubbles before banking were due to debasing money (with base metal rather than paper). The tulip bubble was due to a futures market in tulip prices as shown by Doug French. All the later bubbles were due to paper money or debt leverage (fractional reserve banking). Please point to the Rothbard article. I do not think he would ever make that mistake.

Ron Finch June 1, 2010 at 8:56 am

Sorry for sounding harsh.

Horst Muhlmann June 1, 2010 at 10:24 am

The unemployment rate during the First Great Depression averaged 17.1%. This is the average of the unemployment rates from 1930 – the first full year after the stock market crash, through 1940 – the year Roosevelt instituted the draft. See http://www.u-s-history.com/pages/h1528.html.

The government’s own U6 measurement of unemployment has the unemployment rate at the same 17.1 percent. See http://www.bls.gov/news.release/empsit.t15.htm.

We are already in the Second Great Depression. The unemployment rate of the Second Great Depression is already the equal to that of the first. We were a creditor nation during the First Great Depression, and actually had a manufacturing base then. With the Second Great Depression, we are the largest debtor nation, have no manufacturing base, and 10.5% of people are in the modern equivalent of the bread line – the food stamp program. See http://www.reuters.com/article/idUSTRE4B28CB20081203. We also have tent cities. See http://www.verumserum.com/?p=4049 and http://www.huffingtonpost.com/2009/12/14/obamaville-springs-tent-c_n_391093.html

The Second Great Depression is already worse than the first, and the you-know-what hasn’t even hit the fan yet.

Bob Murphy May 31, 2010 at 11:17 pm

JFC, good comments, just two points:

(1) I think it is fine for me to compare FDR deficits with Reagan deficits to see if the former are “cautious.” Krugman didn’t say, “Yes FDR ran huge deficits, but they weren’t big enough, given the excess capacity in the economy at the time.” No, he said FDR was cautious about running deficits. I could say the same thing about Reagan; hey he “had” to fight the Soviets and cut marginal income tax rates, and thus he “had” to control the growth in food stamp spending because he was worrying all night about the deficit. Krugman would reject the latter out of hand and so Reagan obviously was not cautious about deficit spending.

(2) The Fed contracted the monetary base sharply in 1920-1921 and CPI fell 15% in 12 months. If that’s not tight money I don’t know what is.

Jonathan Finegold Catalán June 1, 2010 at 12:22 am

I think it was Matthew Swaringen who commented on your Reagan/Roosevelt comparison. Regarding the Depression of 1920, I agree that the monetary base contracted, and I agree that the Federal Reserve practiced tight monetary policy. My point has more to do with government fiscal policy. The common Austrian argument is that the Depression of 1920 is an example of an economy rebounding very quickly without fiscal spending. My point is that in this case the Depression of 1920 is a poor example, because there was no liquidity trap and in the purest sense Keynesians argue for deficit spending when there is a liquidity trap (because there is a lack of private spending).

Ron Finch June 1, 2010 at 8:54 am

You guys also need to look at post WW II. Why did we not fall back into depression after WW II? There is a good case for an economic boom from doing the opposite of everything keynesian.

michael June 3, 2010 at 8:35 am

Why did we not fall back into depression after WW II? First, nearly everyone admits that what got us out of the Great Depression was wartime deficit spending– even though it was on an unproductive product (weapons of destruction). That is, a product that could not be sold, so was produced at a 100% loss on investment.

But one, it put money into everyone’s pockets– money that was not spent on scarce consumer goods because there was little on the shelves. And at the end of the war, many manufacturers retooled to bring out new consumer products, satisfying that great pent-up demand with washers, freezers, nylons and new Dodges. So in short, employment reached high levels during wartime production and stayed high afterwards to service postwar demand. The money was flowing! Enough so that the taxes on all that income were quickly able to pay down our wartime debts.

Two, of course, was that much of our wartime production continued unabated in the postwar period. Many had been getting rich from servicing the war machine and saw no great reason to change horses just because the war had ended. All we needed was another enemy. And we quickly found one.

In either event the country had more business than it had ever enjoyed before. War and peace both proved to be very lucrative professions, thanks to the seed money government provided in 1942-45 to get things rolling.

Ron Finch July 27, 2010 at 10:27 am

So, savings from the war years fueled a boom when government spending was cut back from over $90 billion to a low of $30 billion. Sounds very Austrian. For national policy, let’s encourage savings and Freedom but discourage war and government spending. I like it!

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