Everything Wrong with the Hoover Administration

Herbert Hoover, the thirty-​first President of the United States, who occupied the White House from 1929 to 1933, generally falls near the bottom of presidential rankings. However, his position in those rankings is not due to his forgettability as a president (unlike Rutherford B. Hayes or Chester Alan Arthur). In fact, he is one of the most discussed presidents.

Why such a contradiction? Because he is frequently used as a boogeyman to be trotted out against “do-​nothing-​ism” when a crisis emerges. Depicted as a passive actor with regard to both the onset of the Great Depression and its remedies, no politician wants to be compared with Hoover. Few political boogeymen are as efficient as Hoover.

Hoover, who had long been associated with the more progressive wing of the Republican Party (he had even pondered a run as a Democrat in 1920)^[1], was a proactive president who proposed numerous government actions in response to the Great Depression. This was in marked contrast to earlier recessions.^[2] Many of those actions deepened the downturn. Some economic historians even claim that his signing of a substantial tariff increase in 1929 caused the Great Depression. Hoover’s missteps weren’t limited to economic policy. Once he became president, Hoover ignored his earlier views with regards to race relations and fought against anti-​lynching bills. Overall, Hoover was not an inactive president. He was immensely proactive and many of his actions caused significant harm.

A discussion of the origins of the Great Depression is necessary to understand the mischaracterization of Hoover as a do-​nothing president. First, the Great Depression was an exceptionally large contraction. Figure 1 below illustrates the level of living standards (GDP per capita) during the Great Depression as a share of what it would have been had it continued on the same trend as from 1865 to 1929. Notice the depth at 1933—a ratio of 0.65 (i.e., 65%). This is a substantial deviation from the long-​run trend in growth. Notice also the duration—the economy never returns to trend (which would be represented at returning to the level of 1 on the graph). To understand the momentousness of that contraction, contrast Figure 1 with Figure 2 which shows the experience of the 1921 recession. Up until that point, the 1921 recession had been one of America’s deepest. However, it was nowhere as deep nor was it as long-​lasting. By 1923, the economy was back on trend, whereas the economy had not yet recovered from the Great Depression a decade after the initial contraction.

Economic historians who study the Great Depression are interested in explaining three separate issues: The first is the origin of the contraction (which corresponds to the downturn from 1929). The second is the depth of the recession (why did it go as low as what was observed in 1933). The third is the duration (why did the economy fail to recover by 1939). Of those three issues, Hoover’s presidency speaks to the first two. The latter issue is of greater relevance to Roosevelt’s presidency.^[3] As such, we can assess the Hoover administration’s economic legacy by asking: a) what was Hoover’s contribution to initiating the Great Depression; and b) what did Hoover do to worsen the downturn?

With regard to the issue of the origins of the downturn, most economists and economic historians hold the view that the blame is to be borne by the Federal Reserve.^[4] The finer details of the mechanism are in debate, but the core story is relatively well accepted. By allowing banks to fail throughout the country without increasing the monetary base, the Federal Reserve let the money supply contract rapidly causing deflation. In the presence of sticky prices and wages, the economy could not adjust by adjusting only prices. It had to adjust by decreasing output as well, which explains the depth of the recession. In that story, the Federal Reserve’s inaction to the financial downturn of 1929 is the culprit to blame. Monetary policy explains it all. This dominating role for monetary policy appears to leave little to no room for assigning blame to Hoover as he was not in charge of monetary policy—that was the purview of the Federal Reserve.

However, some economists argue that Hoover did precipitate the contraction through the role of the Smoot-​Hawley tariff.^[5] Passed in 1930, the tariff caused the average duty on dutiable goods to go from 40 percent in 1929 to 59 percent in 1932.^[6] More than a thousand economists signed a letter demanding Hoover veto the tariff increase—to no avail.^[7] At first glance, with international trade representing less than 5 percent of gross national product (GNP), the effect of a tariff increase appears insufficient to explain the Great Depression. Many economic historians, while agreeing that the tariff caused harm, agree that it cannot explain the downturn, which is why some of them find that the tariff explained only roughly a fifth of the increase in unemployment between 1929 and 1933.^[8] However, other economists counter that international trade as a share of total output is a misleading figure.^[9] This counterargument can be divided into two variants.

First, if international trade was providing key intermediate goods, the tariffs distort the production of some final consumption goods. This is especially true in industries where it is difficult to find substitutes for imported intermediate goods. The result, according to this view, is that the tariff worsened the downturn dramatically. This first view suggests that the role of monetary policy in the initial downturn is exaggerated. While the tariff did not start the Great Depression, this first source of counterargument means that the initial contraction was in large part the result of Hoover’s signing of the Smoot-​Hawley tariff. That first counterargument has gained traction within the profession and it is now widely accepted that the effects of the tariff might have been long underestimated.

The second source of counterargument is one that ties the tariff’s passing directly to the banking crisis. In the absence of the tariff, the contraction in the money supply would have caused deflation in the United States—meaning that U.S. prices would have been lower relative to prices abroad. This would have allowed an increase in foreign demand for American goods and rising net exports—thus compensating the contracting effect. The tariff prevented that mechanism from operating. In fact, because it actually increased American prices relative to prices abroad, the mechanism worked in the opposite direction: foreign countries cut back on importing American goods. This initiated a chain reaction. First, the production of goods whose foreign demand fell most was geographically concentrated in the United States. Second, because banks in the United States were prohibited from operating branches in multiple regions of the country, the regionally-​concentrated downturns converted themselves into regionally-​concentrated bank failures. These bank failures then caused the money supply to contract. According to this second counterargument, monetary policy was not the proximate cause of the economic collapse; trade policy was. The contraction in the money supply was, according to this view, a result of the tariff. The inaction of the Federal Reserve in order to offset that contraction would not have been as much of a problem had it not been for the tariff. In other words, the tariff that Hoover signed—according to that counterargument—caused the Great Depression.

If there is a debate over whether Hoover’s policy decisions initiated the Great Depression, there is clear evidence that many of his decisions deepened the downturn. One such decision was the implementation of what came to be called the “high-​wage doctrine.”^[10] The doctrine essentially held that reducing wages during a recession was counterproductive because it reduced the purchasing power of workers. As a result, demand for goods that workers purchased would fall, and more unemployment would emerge. As one government official stated in 1930: “in this enlightened age when it is recognized that production is dependent upon consuming power, it is my judgment that large manufacturers and producers maintain wages and salaries as being the farsighted and in the end most constructive thing to do.^[11]”

The problem with this doctrine is that it conflates nominal and real prices. As the main determinant of real wages is productivity, we should expect that real wages and productivity would increase in lockstep. As a result, for a given level of productivity, dividing the real wage rate by the real value of the output of an hour of work should always yield a constant. If a contraction in the money supply occurs and all prices can immediately adjust, there will be a lower nominal wage rate. However, because the price level also falls, the ratio of real values is unchanged. The rub comes when there is uneven price rigidity—i.e., prices of goods adjust more easily than wages for labor. When this happens, the contraction in the money supply causes the real wage rate to increase. While productivity (units per hour of work) is unchanged, the falling prices means that firms obtain less per unit of output. As a result, firms cannot afford to keep workers on the payroll and have to fire many of them which, in the process, also leads to a contraction in total output.

Normally, economists expect wages to be more rigid than prices.^[12] However, Hoover acted deliberately to prevent wage rates from falling.^[13] He essentially introduced more rigidity than normally existed. This was in opposition to those he derided as “the leave-​it-​alone liquidationists” who wanted him to do nothing.^[14] Adhering strictly to the high-​wage doctrine, Hoover invited business leaders to a series of White House conferences as early as November 1929. At each conference, he exhorted them to maintain wage rates—an exhortation that many large employers followed as it was accompanied by a promise to limit labor unions.^[15] These conferences were accompanied by behind-​the-​scenes calls to forestall wage cuts.^[16] For a year and a half, Hoover was able to forestall wage cuts,^[17] which meant that wages were more or less stable while prices had fallen by close to 20 percent.^[18] While Hoover also pushed for work-​sharing arrangements, which appear to have had positive effects,^[19] the effect of forestalling wage cuts dominated, so that the contraction was made more severe on net. Simulations of the effects of this forestalling of wage cuts find that “Hoover’s program substantially depressed the economy, reducing aggregate output and hours worked by about 20 percent”.^[20] More recent efforts to estimate the effect of this forestalling by using industry-​level wages (rather than economy-​wide average wage rates) suggest even larger effects.^[21]

This policy of forestalling wage cuts also fueled a further contraction of the money supply according to some economists. Because the falling prices combined with stable wages meant lower profits, the assets held by banks fell in value making them more fragile in the process. The decline in “business profits had an adverse impact on the quality of bank portfolios, causing depositors to become wary and leading to a fall in the deposit-​currency ratio in the economy.”^[22] This essentially fueled the decline of the money supply, leading to a greater need to cut wages and prices to reflect the change in monetary conditions. The contraction became more severe.

In addition to his counterproductive policy of forestalling wage adjustment, Hoover also intervened aggressively in agricultural markets—something that he had already been advocating for when he was Commerce Secretary in the Harding and Coolidge administrations.^[23] Under Hoover’s directive, the Federal Farm Board picked two crops, wheat and cotton, and pegged their prices at a fixed level: 80 cents/​bushel and 20 cents/​pound respectively.^[24] Should the market price of the farmers’ goods fall below the floor, the taxpayer would buy the goods at the floor price. With prices guaranteed, farmers increased production—including farmers who were producing other crops or who specialized in animal production. There was excess supply and large quantities of cotton and wheat were simply left to spoil. This overproduction became campaign fodder for Roosevelt during the 1932 election.

Finally, Hoover also adopted a somewhat surprising fiscal policy by raising income and excise taxes and spending at the same time.^[25] The mainstream view among economists is that, during recessions, tax rates should not be altered and that a temporary deficit is acceptable as long as future tax revenues are used to pay back the accumulated debt. Raising taxes during a recession to fight a deficit only deepens the trough. The result was to further damage economic growth. However, we should not assign too large a role for this aspect of Hoover’s policy. For the entire 1930s, when taxes were further increased by Roosevelt, the effect of tax hikes explains at best 20 percent of the slow pace of the recovery.^[26]

Hoover’s blunders were not limited to economic mismanagement. Two other policies in particular bear mentioning: his flip-​flopping on lynching and his stance on deportation of Mexican Americans.

Earlier in his political career, Hoover had expressed racially progressive views. These views probably explain why after flirting with both parties in the 1920 election, he went with the Republicans. Indeed, his views on racial matters would have made it harder for him to secure a position on a Democratic ticket with its strong southern base. However, once president, he practically repudiated them. Hoover purged many African-​Americans from leadership positions in the Republican Party in order to loosen the stranglehold that Democrats held on the South.^[27] In 1928, the Republican Party platform included a renewed call to enact “at the earliest possible date a Federal Anti-​Lynching Law so that the full influence of the Federal Government may be wielded to exterminate this hideous crime”. Yet, as president, Hoover resisted pushing for such legislation.

While the Republican Party had generally defended anti-​immigration policies since the 1880 election, when James Garfield had defended the idea of prohibiting Chinese immigration, Hoover took anti-​immigration policies to another level. Most notable was his appointment of William Doak as Labor Secretary. Doak selected Mexican Americans for deportation because it was claimed that many were illegal immigrants. At a minimum, some 300,000 Mexican Americans were deported—a substantial share (maybe as many as half) of whom were birthright citizens.^[28] While obviously hurting the living standards of the deported, Hoover’s policy appears to have noticeably impoverished native-​born Americans, too.^[29]

On multiple grounds, it appears clear that Hoover was not a do-​nothing president. He was proactive: not just by contemporary standards, but also by modern ones. Many of his policies, such as lobbying firms to not precipitate wage cuts, were repeated by later presidents, such as Lyndon Johnson.^[30] The interventions Hoover made were largely counterproductive. His tariff policy clearly deepened the contraction; it may even have caused it. His commitment to the high-​wage doctrine meant the implementation of labor policies that forced further firings and closures. His fiscal policy of tax hikes was ill-​timed. He flipped-​flopped on racial issues while his deportation of Mexican Americans impoverished not only the deported, but also impoverished native-​born Americans.

But why is Hoover judged poorly as a president, exactly? It cannot be because of these poor outcomes. If assessments were based on them, then Franklin Delano Roosevelt should likewise fair poorly in presidential rankings. Indeed, the evidence tends to tilt toward saying that Roosevelt at best had no positive net effect on the economy (some policies were good, some were bad), and at worst a net negative effect (notably through the National Industrial Recovery Act and the National Labor Relations Act). Even accounting for his wartime leadership, Roosevelt should be noticeably closer to Hoover in rankings if we are to judge them based on their similar tendencies to intervene and the equivalently disappointing results those interventions produced. Yet, Roosevelt is typically ranked quite highly—which suggests there is something is being held against Hoover but not against other presidents to the same degree.

One potentially strong explanation for this is Hoover’s exceptional post-​presidential lifespan. Expelled from office in 1933, he lived for another 31 years and kept himself in the public eye.^[31] He repeatedly criticized Roosevelt’s policies (even though they were very similar). This further marginalized him because of the clear popularity of his successor. More importantly, his criticisms of Roosevelt left the impression upon many that he was a laissez-​faire dogmatist even though he was not. The result is the political hot poker that we know today: apply the name of Hoover to a politician one dislikes to suggest that he cares little for the plight of those who suffer most during a downturn. That hot poker only works because it is factually wrong on multiple grounds.