Once upon a time, the stock market crashed. Bad times loomed. The US president, a Republican, was eager to disprove the stereotype of Republican politicians as "leave it alone liquidationists". He tried to respond in a prompt and humane fashion.
He called big business to an emergency summit. He led Congress in passing a number of desperate measures to shore up the domestic sector. And then, for good measure, he bashed speculators like crazy, changed the rules that governed Wall Street and went around lecturing anyone who would listen on the importance of corporate responsibility.
That president was not George W. Bush. It was Herbert Hoover. Today, Hoover is routinely cited as the leader whose errors helped bring on the Great Depression. His mistake, it is said, was failing to recognise that only government can rescue the economy when the trouble is truly serious. But the reasoning is faulty, for Hoover was hardly the laisser faire purist he has been labelled.
His nickname in his day was "the great engineer", not merely because he had studied engineering, but also because he loved to tinker and intervene, especially in emergencies. Before his presidency, Hoover had orchestrated the rescue of starving Belgium, as well as the relief programme for the US south after the great flood of the Mississippi River. Despite such practice, there is evidence that Hoover's interventions after 1929 were disasters. Murray Rothbard, the late economist, even argued that they turned slump to depression.
Hoover's story is a reminder that benevolent action can sometimes be more destructive than inaction when it comes to a fragile economy. The story is especially important for Republicans, who tend to tell themselves, as Hoover did, that economic crises warrant a suspension of free market principles.
Take the Hoover administration's farm policy. Like President Bush's recent farm legislation, it aimed to improve the financial lot of farmers through subsidies. Hoover sought to help farmers get a better price for their wheat: through the Federal Farm Board the administration made loans to farmers who withheld produce from the market, the aim being to drive prices upward. Days after the stock market crash, it lent $150m (about $1.5bn, or £1bn, at current prices) to farmers.
Rothbard notes that the subsidy actually led farmers to expand their acreage, thus aggravating the original surplus problem. What is more, the policy lost farmers market share, as foreign competitors not bound by US agreements could sell their wheat more cheaply. In other words, Hoover's agricultural policy helped to ensure that farms would not be competitive, and so contributed to the overall inefficiency of a flailing economy.
Protectionism was Hoover's second great mistake. Following Republican commitments made at a convention in Kansas City, he signed the Smoot-Hawley tariff act into law, increasing duties to an average of 16 per cent of import prices from 13.8 per cent (as Hoover reckons in his memoirs).
Again, the aim was understandable: Hoover wanted to shelter ailing US companies, and was seeking revenue for federal coffers. Nonetheless, the new tariff deepened economic trouble. Like the Bush administration's (much smaller) action to protect the steel industry, Smoot-Hawley antagonised foreign trading partners. The increase in duties triggered the global trend towards protectionism that deepened the Depression.
Wall Street proved a third playing field for Hoover. He had long opposed what he called "vicious speculation". Like President Bush, he called for changes to the law following the market's crash. Hoover made war on market bears, pushing authorities at stock exchanges to restrict short selling. Hoover's idea was to slow the market's slide. In fact, his new rules on short sales had the opposite effect. As Rothbard notes, they "helped drive stock prices lower than they would have been otherwise, since short sellers' profit-taking is one of the main supports for stock prices during a decline".
Last of all, Hoover bullied industry into sustaining wage rates even as profits and prices fell, the theory being that strong wages would increase purchasing power and so stimulate the economy. Most followers of classical economics found this idea outrageous (Albert Wiggin of the Chase National Bank later blamed Hoover for lengthening the Depression, arguing that "it is not true that high wages make prosperity. Instead, prosperity makes high wages.") Nonetheless, at a White House meeting on November 1929, Henry Ford, Walter Teagle of Standard Oil and other businessmen agreed to the wage regime. Employers who could not afford the rates folded, and unemployment doubled over the next few months.
What of today? George W. Bush's advisers would not push for anything like Hoover's wage plan. Still, the Hoover story is relevant to this White House for at least two reasons. The first is the Republican argument that says: "It's important for this administration to act, or at least give the appearance of action." This may be true politically. But it is not necessarily true economically. Even relatively mild or seemingly necessary steps can prevent the market from clearing itself of inefficiencies, and slow the economy's own natural recovery. The negative consequences of intervention cannot be disregarded.
The second reason is Hoover's grand failure, one so great that he died - despite his monumental humanitarian record - with a reputation as the father of shantytown "Hoovervilles". The lesson is that it is rarely worth giving up one's principles to gain popularity. Mr Bush began his presidency as a pro-growth free marketeer; sustaining that focus will reduce the risk of going down in the books as George Herbert Hoover Bush.
© Copyright 2002 Financial Times
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