New Deal economics: lessons from Herbert Hoover
Bill Jamieson says calls for a Rooseveltian New Deal to stave off US recession are misinformed; it was FDR’s much-maligned predecessor who set the course for recovery Ayear into the credit crunch and the world’s leading economies seem locked in a macabre race to be first over the recession line. America, a few months ago firm favourite, has lost the lead to Germany. Or is it France? Or Spain? Is Japan already over the line? In truth, who ‘wins’ is secondary to the direction in which the global economy is heading and the sense of apprehension over further shocks to come in the banking system. Little wonder that in France, Spain and Britain there is growing talk of emergency action, and that across America, many have been urging a ‘New Deal’ Obama presidency.
Indeed, a head of steam is building up for New Deal politics: policy actions in Europe and America that will cushion if not reverse the downturn. In America, interest rates have already been slashed to 2 per cent and the administration has given a $600-a-head tax rebate to help boost consumer confidence and spending. While these have helped the economy skirt recession so far, it is still likely to enter one.
Domestic consumption barely grew in June and retail sales fell in July. The financial sector has been devastated by huge write-downs against subprime loans and related paper. Bank shares have plummeted. The financial health of the two mortgage giants Fannie Mae and Freddie Mac, together accounting for some $5 trillion of American mortgages, is on a knifeedge. Home foreclosures are 55 per cent up on last year. Across the US the number of jobs lost in the first seven months of the year has hit 463,000. And the prognosis? Worse to come.
Little wonder voters look for a new presidency that will deliver them from this Herbert Hoover misery. The call is for a Rooseveltian New Deal. But the problem with the credit crunch is that it does not lend itself to quick-fix solutions. However, in political terms, it is not the intractability of problems that matters so much as confidence, and a leadership that can convey a sense of being in charge. Without that confidence, little change seems likely. This was where Hoover was seen to have failed, while Roosevelt succeeded.
It was FDR who conjured up the alchemy of hope. But ironically it was Hoover, whose presidency is forever associated with stock-market crash and economic misery, who put in place many of the programmes for which Roosevelt took credit and which we came to know as the ‘New Deal’.
A revisiting of the Hoover presidency is instructive. While the economic backdrop now is of course not nearly so severe, the policy debate is strikingly reminiscent of the early Depression years: the stand-off between those urging sweeping intervention, financial support for banks and public works programmes to lever up the economy; and the ‘liquidationists’ who argued that the evaporation of credit had to run its course and that intervention would only delay recovery.
Hoover was elected president in 1929 in a Republican landslide. Four years later he lost to Roosevelt in a Democrat one. Hundreds of banks had failed, investors had been ruined, farmers made destitute and more than a quarter of America’s adult population was out of work. His period in office was denounced as one of idleness and defeatism. But was history fair to him?
Hoover had firm beliefs in the limits of government and the importance of individual and voluntary effort. But his response to the onset of Depression was interventionist to a degree unprecedented in US history. He was an engineer by background and an activist reformer by nature. ‘Words without actions,’ he once declared, ‘are the assassins of idealism.’ He could be a compelling orator — not as eloquent as Obama, but more engaging in content and argument.
He was clear on what led America to one of the worst decades in its history. ‘Before the storm broke,’ he declared in his speech accepting the Republican nomination in August 1932, ‘we were steadily gaining in prosperity. Advances in science and invention opened vast vistas of new progress. Being prosperous, we became optimistic — all of us. From optimism some of us went to over-expansion in anticipation of the future, and from over-expansion to reckless speculation, and abuse of financial power.’ After the bursting of that reckless boom came bank collapses across Europe — the second punch that was to flatten hopes of an early recovery. Hoover did not spare his audience a dramatic sense of the gravity of the crisis. ‘New blows... from failing financial institutions rained upon our people... The worldwide storm grew rapidly to hurricane force... Fear and apprehension gripped the heart of our people in every village and city.’ Unemployment rocketed and welfare queues lengthened. But by the time Roosevelt entered the White House, the foundations of what we now know as the New Deal had been put in place. Hoover sanctioned some $600 million in federal public works. He made provision for $1.5 billion of loans to ‘self-supporting works’ to increase employment. He persuaded the Ford Motor Company to maintain wages and pressed utility companies to commit $1.8 billion in new projects.
Hoover set up the National Credit Association that helped save hundreds of banks. He created the Reconstruction Finance Corporation with a capital of $2 billion to uphold bank credit: it sustained more than 5,000 banking institutions and the savings of 25 million families. This was the agency that more than 60 years later was to be dusted down by the Reagan administration to tackle the ‘Savings and Loans’ crisis.
It was during the Hoover administration that the functions and powers of the Federal Reserve banks were strengthened. He negotiated a treaty authorising construction of the St Lawrence Seaway along the US-Canadian border. He worked to establish a world economic conference, precursor of today’s global economic summitry. His administration pressed for a moratorium on German government debt repayments. And it was a Hoover-appointed commission that paved the way for an addition al three million acres of national parks.
These combined programmes were unparalleled in the history of depressions of any country. Their purpose, Hoover declared, was ‘to care for distress, to provide employment and aid agriculture, to maintain the financial stability of the country, to safeguard the savings of the people, to protect their homes.’ And there were nascent signs of recovery as early as 1932. Between July and October of that year more than a million Americans had returned to work. So the verdict of economist Bradford deLong that ‘the inaction of the US government during the 1929-33 slide into the Great Depression is both astonishing and puzzling’ needs surely to be qualified.
This record was all the more remarkable given Hoover’s opposition to higher taxes and to raising Federal government debt. ‘It does not follow,’ he insisted in 1932, ‘because our difficulties are stupendous, because there are some souls timorous enough to doubt the validity and effectiveness of our ideals and our system, that we must turn to a statecontrolled or state-directed social or economic system in order to cure our troubles. That is not liberalism; that is tyranny.’ To all this was added Hoover’s belief in the sanctity and importance of voluntary action: ‘Where it becomes necessary to meet emergencies beyond the power of [federal] agencies by the creation of new government instrumentalities... they should be of such character as not to supplant or weaken, but rather to supplement and strengthen, the initiative and enterprise of our people.’ With hindsight, we now know of the fateful failure to respond to the onset of the crisis with interest rate reductions. And the case for running a contra-cyclical budget deficit is now so well established that deficits have become near permanent features: the incoming President this winter will be faced, not with a balanced budget, but with a deficit that is already 3.5 per cent of GDP. Hoover financed big public works programmes through increased taxation — and it was the resort to higher tax that he was later most to regret.
But the doomed Hoover presidency is less an example of ‘what not to do’ as a lesson in what could still be done in the face of a global catastrophe that would have overwhelmed any incumbent. Roosevelt brought to the presidency the hope of change and a programme that inspired confidence. But it was to Hoover that he owed a profound debt for the much of the groundwork that enabled the New Deal to work in the way it did.
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