Five Myths About the Great Depression - WSJ.com
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NOVEMBER 4, 2008
Five Myths About the Great Depression
Herbert Hoover was no proponent of laissez-faire.
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By ANDREW B. WILSON
The current financial crisis has revived powerful misconceptions about the Great
Depression. Those who misinterpret the past are all too likely to repeat the exact same
mistakes that made the Great Depression so deep and devastating.
Here are five interrelated and durable myths about the 1929-39 Depression:
- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-theother way Republican who clung to the idea that markets were basically self-correcting.
The truth is more illuminating. Far from a free-market idealist, Hoover was an ardent
believer in government intervention to support incomes and employment. This is critical to
understanding the origins of the Great Depression. Franklin Roosevelt didn't reverse
course upon moving into the White House in 1933; he went further down the path that
Hoover had blazed over the previous four years. That was the path to disaster.
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Hoover, a one-time business whiz and a would-be all-purpose social problem-solver in
the Lee Iacocca mold, was a bowling ball looking for pins to scatter. He was a
government activist fixated on the idea of running the country as an energetic CEO might
run a giant corporation. It was Hoover, not Roosevelt, who initiated the practice of piling
up big deficits to support huge public-works projects. After declining or holding steady
through most of the 1920s, federal spending soared between 1929 and 1932 -increasing by more than 50%, the biggest increase in federal spending ever recorded
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Public projects undertaken by Hoover included the San Francisco Bay Bridge, the Los
Angeles Aqueduct, and Hoover Dam. The Republican president won plaudits from the
American Federation of Labor for his industrial policy, which included jawboning business
leaders to refrain from cutting wages as the economy fell. Referring to counteracting the
business cycle and propping up wages, Hoover said: "No president before has ever
believed that there was a government responsibility in such cases . . . we had to pioneer
a new field." Though he did not coin the phrase, Hoover championed many of the basic
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Five Myths About the Great Depression - WSJ.com
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ideas -- such as central planning and control of the economy -- that came to be known as
the New Deal.
- The stock market crash in October 1929 precipitated the Great Depression. What the
crash mainly precipitated was a raft of wrongheaded policies that did major damage to
the economy -- beginning with the disastrous retreat into protectionism marked by the
passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the
Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell,
Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and
agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs
that caused the international economy to collapse. Some have argued that the increasing
likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the
stock-market collapse in the fall of 1929.
- Where the market had failed, the government stepped in to protect ordinary people.
Hoover's disastrous agricultural policies involved the know-it-all Hoover acting as his own
agriculture secretary and in fact writing the original Agricultural Marketing Act that evolved
into Smoot-Hawley. While exports accounted for 7% of U.S. GDP in 1929, trade
accounted for about one-third of U.S. farm income. The loss of export markets caused by
Smoot-Hawley devastated the agricultural sector. Following in Hoover's footsteps, FDR
concentrated on trying to raise farm income by such tactics as setting quotas on
production and paying farmers to remove acreage from production -- even though this
meant higher prices for hard-pressed consumers and had the effect of both lowering
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productivity and driving farmers off their land.
- Greed caused the stock market to overshoot and then crash. The real culprit here -- as
in the housing bubble in our own time -- is the one identified by the economic historian
Charles Kindleberger in the classic book "Manias, Panics, and Crashes": a speculative
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fever induced by excessively easy credit and broken by the inevitable return to more
realistic valuations.
In the late 1920s, cheap and easy money fueled a tremendous increase in margin trading
and a proliferation of "investment trusts" that offered little in the way of dividends or
demonstrable earnings per share, but still promised phenomenal capital gains.
"Speculation," as Kindleberger neatly defined it, "involves buying for resale rather than
use in the case of commodities, and for resale rather than income in the case of financial
assets."
The last thing Hoover wanted to do upon coming to office was to rein in the stock market
boom by allowing interest rates to rise to a more normal level. The key to prosperity, in
his view, lay not in sound money and rising productivity, but in letting the good times roll - through government action aimed at maintaining high wages and high stock market
valuations.
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- Enlightened government pulled the
nation out of the worst downturn in its
history and came to the rescue of
capitalism through rigorous regulation and
government oversight. To the contrary, the
Hoover and Roosevelt administrations -in disregarding market signals at every
turn -- were jointly responsible for turning
a panic into the worst depression of
modern times. As late as 1938, after
almost a decade of governmental "pump
priming," almost one out of five workers
remained unemployed. What the
government gave with one hand, through
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Five Myths About the Great Depression –
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increased spending, it took away with the
other, through increased taxation. But that
was not an even trade-off. As the root
cause of a great deal of mismanagement
and inefficiency, government was
responsible for a lost decade of economic
growth.
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Hoover was destined to fill the role of the left's designated scapegoat. Despite that, the
one place where he and FDR truly "triumphed" was in enlisting the support of leading
writers and intellectuals for government planning and intervention. This had a lasting
effect on the way that generations of people think about the Great Depression. The
antienterprise spirit among thought leaders of this time (and later) extended to top
business publications. "Do you still believe in Lazy-Fairies?" Business Week asked
derisively in 1931. "To plan or not to plan is no longer the question. The real question is
who is to do it?"
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In his economic policies and his incessant governmental activism, Hoover differed far
more sharply with his Republican predecessor than he did with his Democratic
successor. Calvin Coolidge, president from 1923 to 1929, made no secret of his disdain
for Hoover, who served as his secretary of commerce and won praise from such highly
regarded liberals as John Maynard Keynes and Jean Monnet. "That man has offered me
unsolicited advice for six years, all of it bad," Coolidge said. He mockingly referred to
Hoover as "Wonder Boy."
With the vitality of U.S. and world economies at stake, it is essential that the decisions of
the coming months are shaped by the right lessons -- not the myths -- of the Great
Depression.
Mr. Wilson, a former Business Week bureau chief, is a writer based in St. Louis.
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