Hoover’s Great Depression

From the August 1932 Republican Nomination Acceptance Speech by Herbert Hoover:

Before the storm broke we were steadily gaining in prosperity. Our wounds from the war were rapidly healing. Advances in science and invention had opened vast vistas of new progress. Being prosperous, we became optimistic–all of us. From optimism some of us went to overexpansion in anticipation of the future, and from overexpansion to reckless speculation. In the soil poisoned by speculation grew those ugly weeds of waste, exploitation, and abuse of financial power. In this overproduction and speculative mania we marched with the rest of the whole world. Then 3 years ago came retribution by the inevitable worldwide slump in the consumption of goods, in prices, and employment. At that juncture it was the normal penalty for a reckless boom such as we have witnessed a score of times in our national history. Through such depressions we have always passed safely after a relatively short period of losses, of hardship, and of adjustment. We have adopted policies in the Government which were fitting to the situation. Gradually the country began to right itself. Eighteen months ago there was a solid basis for hope that recovery was in sight.

Then, there came to us a new calamity, a blow from abroad of such dangerous character as to strike at the very safety of the Republic. The countries of Europe proved unable to withstand the stress of the depression. The memories of the world had ignored the fact that the insidious diseases left by the Great War had not been cured. The skill and intelligence of millions in Europe had been blotted out by battle, by disease, and by starvation. Stupendous burdens of national debt had been built up. Poisoned springs of political instability lay in the treaties which closed the war. Fear and hates held armament to double those before the great conflict. Governments were fallaciously seeking to build back by enlarged borrowing, by subsidizing industry and employment from taxes that slowly sapped the savings upon which industry and rejuvenated commerce must be built. Under these strains the financial systems of foreign countries crashed one by one…

Two courses were open to us.We might have done nothing. 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. We put that program in action

Our emergency measures of the last 3 years form a definite strategy dominated in the background by these American principles and ideals, forming a continuous campaign waged against the forces of destruction on an ever-widening and a constantly shifting front.

Thus we have held that the Federal Government should in the presence of great national danger use its powers to give leadership to the initiative, the courage, and the fortitude of the people themselves, but that it must insist upon individual, community, and State responsibility.

I highlighted the key passage I want to focus on. I strongly suggest you read the whole thing here. It is a sobering address, especially as it contrasts to the Republican acceptance speech he gave in 1928 which I highlighted last week.

I will be short on commentary. The only comment I wish to make here concerns how Hoover is depicted in history. In the average person’s mind, Hoover has a laissez-faire reputation. But, if you read this address in its entirety its pretty clear –at least to me – that Hoover is taking an extremely statist rhetorical approach, especially as compared to his 1928 address.

What’s going on here? Hoover saw the “invading forces of destruction that we have been compelled to meet in the last 18 months” and was compelled to act. It’s as simple as that.

Now, if you are an interventionist, you would see this as a good thing and suggest Hoover should have acted in 1929 instead of much later. If you are a non-interventionist, you would see this as a bad thing and suggest Hoover should have relented and let the depression run its course. Should policymakers have acted sooner or relented?

This is the same dilemma policymakers today face.

Actually, let me say more. Here’s my view.

First, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction. This was true during the Great Depression. We have witnessed it in Japan in the last twenty years and we are certainly witnessing it again in the US and Western Europe.

The middle path that Hoover ploughed and that Obama is ploughing owes to this dysfunction and conflicting priorities. Remember that Roosevelt ran against Hoover in 1932 on a fiscal responsibility platform, much as I anticipate Republicans will against Obama.

Second, no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging.

I have said it before, but it bears repeating here:

There are four ways to reduce real debt burdens:

  1. by paying down debts via accumulated savings.
  2. by inflating away the value of money.
  3. by reneging in part or full on the promise to repay by defaulting
  4. by reneging in part on the promise to repay through debt forgiveness

Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that. More likely, the western world’s collective public sectors will attempt to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.

And unfortunately, a collective debt reduction across a wide swathe of countries cannot occur indefinitely under smooth glide-path scenarios. This is an outcome which lowers incomes, which lowers GDP, which lowers the ability to repay. We will have a sovereign debt crisis. The weakest debtors will default and haircuts will be taken. The question still up for debate is regarding systemic risk, contagion, and economic nationalism because when the first large sovereign default occurs, that’s when systemic risk will re-emerge globally.

It’s the debt; it is simply too high. We are definitely going to see a lot more of 3 and 4. in reducing the real debt burdens going forward. That’s the point I was trying to get across with the first Roach post on debt forgiveness. I doubt we are going to see wide scale debt forgiveness until defaults and debt deflation have taken center stage. That’s the experience of previous depressions and certainly what we saw during the Great Depression. That’s also the point I was trying to get across with the second Roach post on debt forgiveness.

I would also argue that deficit fatigue is inevitable.

Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do. You can make these arguments until the cows come home. It’s not going to work.

I’m just being realistic here. The reality is that people think more about charts and illustrations like this. And what they see is reckless and out of control spending that must be brought to heel. Now, as I mentioned in the deficit fatigue post, “that is certainly why I advised a more aggressive policy response early both on stimulus and recognition of bad debt. A more aggressive response on these two fronts would have dealt with both structural and cyclical causes of recession.” An aggressive response would have been much more effective in holding deficit fatigue at bay. But that is water under the bridge. We’re here now.

Sorry, that was a lot more commentary than I anticipated. I just thought some of it needed to be said. Comments appreciated

  1. Wasabi says

    Edward, deficit fatigue is *not* inevitable. It only is if all the leading political figures, starting with Obama, try their best to scare the public into believing it is. If fatigue does set in, it will be the politics of fear which creates the fatigue, not clear economic thinking. Fatigue is preventable if pundits like you fight back instead of giving in to resignation. Private debt forgiveness and more public deficit spending are *not* contradictory or mutually exclusive, and pundits and other media figures need to say so loudly and clearly.

    Thanks very much for the interesting quote from Hoover! But many of the “grand bargain” $4 trillion in austerity cuts that Obama is still fighting for are closer to the thinking of Mellon than Hoover. If we could bring back Hoover in a time machine, he would surely be a little better than Obama. Where is our FDR? This crisis is wholly politically-created. It’s not just a matter of “dysfunction.” It’s a matter of neoliberalism being espoused by the leaders of both parties and the lack of a major candidate for president who is willing to say No! to austerity.

    1. Aaron R says

      Unfortunately, I think if deficits are high enough to make the economy seem OKAY, then the crisis will drag on. People will think “Hooray, the crisis is over!” and deleveraging will halt. I think the ebb and flow of stimulus/austerity is necessary given human psychology.

      1. Edward Harrison says

        Agree 100% Aaron. Thanks.

  2. fresno dan says

    Very insightful post.
    But I would emphasize how much of the failure is not due to the borrowers, but the lenders.

    9/1/2011 date
    I don’t have time, but google William Black for all the “looting” done by bankers. Its easy to make loans (and get bonuese) if you know you are going to be bailed out.

    I would just point out that a lot of the “debt” is invalid – it was fraudulently generated. An awful lot of purposeful “not knowing, or not wanting to know.”
    And believe me, I am not some bleeding heart who thinks people shouldn’t be responsbile.
    But I would ask: How many people actually read every document when they bought a house? I perused most of them, I didn’t understand a lot of things, and the answer I got to some of my questions I didn’t like. But it was also, if you want to buy a house, that is what you have to do.

    But the government and banks, cajoling and encouraging that everyone should own a home because it was financially responsible, bears a good deal of responsbility.
    What was the point of the NRSRO? Why do they still exist with the imprinteur of US law?
    What was the point of OFHEO?
    I would run out of room with all the acronyms for the regulation of banks…
    Next we could go on about accounting rules…or rather the lack of prudent accounting rules and the lack of accountability of…accountants.

    My analogy being: If you buy a new car, the brakes don’t work and you run over a nun in a crosswalk, before you charge the driver you should consider the car brakes: they were never designed to work, the brake design has government oversight (which was useless), the brakes were marketed as working, the marketing of the car has government oversight, the government licenses the car dealer and inspects the car dealer, the mechanic checked the brakes (who by the way is also licensed) and didn’t know a good brake from a bad brake, and so on. (How many people reading this actually know how to evaluate AND monitor their car brakes for sudden failure?)

    Do you hold the driver responsbile? Why in the hell were all these other people being paid???

    1. Edward Harrison says


      Thanks for the comments. The owning a bank and robbing it reference was an ode to bill Black, who I linked out to in the naked capitalism version of the post. here’s a link to a great talk he gave.


  3. David Lazarus says

    The alternative is austerity of which there is definitely eventual austerity fatigue. Debts need to be written down. Banks need to accept losses. If deficits spending is the only alternative then it becomes much more palatable.

  4. Anjon says

    Thanks for the fantastic post Ed. It reminds of some great posts you did a few years back like “recession is over but the depression is just beginning”

    Obama and Hoover are evidence of the failure of MMM – “moderation”, “middle path” and “muddle through” approach.
    (no relation to MMT)

    I remember back in Spring of 2009 when Obama/Geithner decided to go “muddle through” and refused to do anything that involved debt-restructuring (receivership for TBTF, cram-down,REAL stress tests etc) and conversely decided to reflate, I 50% gave up on the Obama Presidency in his 4th month. In retrospect, that was optimistic

  5. Element says

    Thank you for saying that Edward, I love CW and your more forthright comments.

    I have been finding it very hard to relate to your pragmatic policy voice for some time.

    Now I see we more or less agree where this is going, and that the ‘real’ world will not conform to theory.

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