One persistent myth that libertarians and other free-market types have to unmask is that President Herbert Hoover’s belief in laissez faire was responsible for dramatically worsening what became the Great Depression. The myth that Hoover stood around and did nothing while the economy collapsed gets repeated ad nauseum in the media by pundits including everyone from Nobel Prize winners like Paul Krugman to, most recently, MSNBC talk-show host Rachel Maddow.
The punditry is right about one thing: Hoover can be blamed for turning what would have likely been a severe but short market correction in the wake of the artificial boom of the 1920s into a deep and long Great Depression. The reason, however, is not that Hoover did nothing, but that he did many things. Hoover, much like FDR, was skeptical about free markets, as both his earlier work as secretary of commerce and his own description of his beliefs made clear. Faced with the worsening crisis in the fall of 1929, he expanded the federal government’s role in a whole variety of ways.
Long List of Interventions
Without going into detail about any one of them, the Hoover interventions include: expanded public works, greater government control over agriculture, the Smoot-Hawley tariff, a virtual end to immigration, government loans for construction and other businesses, and greater enforcement of antitrust laws. Most important was Hoover’s pressuring businesses to not cut wages even as the prices of their output fell. The result was higher real wages, which were responsible for the unemployment rate topping out at 25 percent, causing the greatest human toll of the Great Depression. (I ignore here the very important mistakes made by the Federal Reserve System in allowing the major deflation to take place, not because it was unimportant – it was crucial to making matters worse – but because Hoover had no real control over the Fed.)
Hoover also proposed budgets that raised total federal expenditures by almost 50 percent in nominal dollars and over 60 percent when we adjust for the deflation. He ran budget deficits in 1931 and 1932 that were 52.5 percent and 43.3 percent of total federal expenditures those two years. No year under Roosevelt between 1933 and 1941 had a deficit that large. Finally, in 1932 Hoover presided over the largest peacetime tax increase [1] in U.S. history, which among other things increased the income-tax rate on top incomes from 25 to 63 percent. This is hardly the program of a man committed to laissez faire.
[read on at the above link and read more in depth in Amity Shlaes' "Forgotten Man"]
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