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