Navigating The Slippery Slope: How Hoover's Interventions Paved The Way For The Great Depression
Authored by Vibhu Vikramaditya via The Mises Institute,
Herbert Hoover's presidency is often mythically mischaracterized as a period of strict nonintervention in the economy. However, it was in fact defined by a series of economic maneuvers that not only deviated from laissez-faire ideology, but also significantly contributed to the onset of the Great Depression. He initiated his term in 1929 with a proactive push by establishing the Federal Farm Board and later the Reconstruction Finance Corporation. These testified to his interventionist approach, aimed at countering economic instability with federal support that ranged from agricultural price supports to protective tariffs and substantial public works investments. These policies failed to grasp the underlying economic frailties that, combined with a long recession in overexpanded agriculture, inadvertently magnified the crisis.
The Long Recession in American Agriculture
World War I, primarily waged in Europe, signaled the decline of the old elites and the end of nineteenth-century liberal economic practices. It fundamentally altered American agriculture because European resources once dedicated to food production had shifted to military needs. This caused a surge in demand for food exports and other essentials from the neutral United States. The beginning of World War I in 1914 ignited a period of economic prosperity for American farmers. This demand led to an increase in prices for various farm products. For example, in Minnesota, the average price of corn per bushel increased from fifty-nine cents in 1914 to $1.30 in 1919, and wheat prices saw a rise from $1.05 per bushel to $2.34. The prices of hogs and milk experienced similar surges.
To fulfill this rising demand, the US government urged farmers to augment their production, and it made credit more elastic. The Federal Farm Loan Act was established by Congress in 1916, introducing twelve federal land banks designed to provide enduring loans for the expansion of farms. Many farmers seized this and similar opportunities, investing in additional land and modern equipment because they expected the economic surge to persist. They invested in land, tractors, and other new labor-saving equipment at interest rates ranging from 5 to 7 percent. By 1920, 52.4 percent of the 132,744 Minnesota farms reporting to the Census of Agriculture carried mortgage debt, totaling more than $254 million.
Thus, after entering World War I in 1917, the US saw significant agricultural expansion, especially in the Midwest's wheat and corn areas. Minnesota's land prices doubled between 1910 and 1920 due to high demand, and by 1929, its farmland cultivation had soared to 18.5 million acres. However, following the wartime boom in agriculture, Europe recuperated from the war's devastation, and postwar relief efforts were required to keep the demand for US agricultural exports—like grains, pork, beef, and dairy—high from 1918 to 1919.
US farmers continued to increase production expecting stable demand and prices, but they were met with a gradual economic decline that plummeted further during the Great Depression. Minnesota farmers' income dramatically dropped from $438 million in 1918 to a mere $229 million in 1922. It continued to decline, plagued throughout the ’20s as a hangover from the unsustainable wartime boom, finally plummeting in 1932 to $155 million. Grounded in the progressive ethos of the time, Hoover sought to actively intervene in the agricultural economy to bring about stability and prosperity. His belief in cooperation between the government and business sectors served as a fundamental principle guiding his policy initiatives as the secretary of commerce from 1921 to 1928.
Hoover recognized the issues of overproduction and subsequently plummeting prices, but he was oblivious to the role that the government had played in overproduction by encouraging overexpansion. He advanced the idea of cooperative marketing associations in the belief that by banding together to sell their products, farmers could stabilize prices and increase their bargaining power, which would mitigate the influence of middlemen and reduce market volatility. This agricultural crisis saw the US becoming heavily protectionist, with heavy tariff impositions on imports (in 1921 and 1922) to prop up domestic agricultural prices. Every possible action was undertaken to avoid the temporary pain of trimming overexpanded industries, which would have allowed capital, labor, and land to find more profitable uses than agriculture.
This, then, was Hoover’s underlying experience with American agriculture during the Roaring Twenties as secretary of commerce while another sector of the economy, manufacturing and industry, was booming. His experience with agriculture played a determining role in his response to the recession during 1929–30, and it was his actions as the commerce secretary—and misunderstanding the causes of the ills of agriculture—that prepared the ground for the Great Depression. He applied his precedent of dealing with the 1920s crisis in agriculture with an engineered central plan, in the same way as he did during the 1929 crisis throughout the entire economy.
The war had transformed the US into an economic behemoth. It was the sole major nation remaining steadfastly on the gold standard, which attracted a gold influx as global investment shifted stateside. This influx had the potential to stimulate economic expansion and rejuvenate agriculture, yet the Federal Reserve's nascent policies were also pivotal in shaping this outcome. In the post–World War I period, the Federal Reserve (newly created in 1913) embarked on a strategy of lowering discount rates to facilitate borrowing and liquidity. In the early 1920s, the New York discount rate was cut from 6.5 to 4 percent, a stark reduction aimed at invigorating economic activity. This policy contributed to a significant uptick in the money supply, with an annual expansion rate of about 7.7 percent from 1921 to 1928. The surge in liquidity and easy credit fueled speculative investments, inflating capital goods, stock, and real estate values to unsustainable highs. When the Fed tightened interest rates in 1928 and 1929 to curb speculation, the boom faded, leaving the still-struggling agricultural sector behind.
Setting up the Great Depression
Upon becoming president in March 1929, Hoover launched the Federal Farm Board with $500 million to manage agricultural prices by handling surplus goods—a significant move to aid farmers by aiming for price stability and more reliable incomes. Yet this effort essentially propped up artificially high prices in a sector needing adjustment through brief deflation. Following the 1929 crash, Hoover extended these interventionist tactics to the broader economy, thus replicating the agricultural sector's stagnation across the entire economic landscape. Hoover subscribed to the wage theory of recessions, which held that the lack of spending power among the workers was the source of the slump and overproduction. In response to the economic crisis, Hoover convened several economic conferences, gathering business and labor leaders to formulate strategies for economic stabilization and recovery.
Central to these discussions was the issue of wages. Hoover strongly advocated against wage reductions, positing that wage maintenance would preserve workers’ purchasing power, thus sustaining demand and preventing further economic decline. The policy faced obvious and significant opposition from business leaders, who argued that wage maintenance exacerbated unemployment by discouraging hiring and straining business finances. Despite the fact that it had always been the norm for wages and prices to fall during recessions, Hoover remained stern and thus precipitated more unemployment as businesses went bankrupt paying artificially high wages.
Hoover responded to rising unemployment and economic stagnation by boosting federal investment in public works, notably speeding up the construction of projects like the Hoover Dam. These efforts sought to generate jobs, stimulate industry, and improve infrastructure. However, despite these ambitious objectives, the public works programs fell short, unable to address the root issues of overexpansion across multiple sectors. In 1930, Hoover signed the Smoot-Hawley Tariff Act despite a petition from more than a thousand economists urging him to veto the legislation as it was a misguided attempt to shield US businesses and farmers from international competition through imposing high tariffs on imported goods. Although intended to protect domestic industries during the onset of the Great Depression, it proved counterproductive, exacerbating both deflation and inflation and hindering recovery.
The act’s protectionist approach ironically perpetuated deflation by raising import duties to record levels, stifling trade and economic growth. It also disrupted price adjustments needed for recovery, as the raised import prices led to inflationary increased domestic prices, discouraging consumer spending. Far from promoting economic recovery, the act provoked international retaliation, sparking a global trade war. This retaliation saw US imports and exports nosedive by 66 percent and 61 percent respectively between 1929 and 1932, thus undermining any recovery efforts and leading to a decline in output.
Similar to his efforts in agriculture, Hoover established the Reconstruction Finance Corporation in 1932, marking a significant escalation in federal economic intervention. The Reconstruction Finance Corporation was tasked with providing crucial financial assistance to banks, railroads, and other major industries, aiming to prevent further economic collapse by ensuring these sectors’ continued operational viability. It had the same effect of propping up the artificially inflated capital values of banks, firms, and major businesses that actually needed quick and thorough liquidations, as had occurred in earlier historical downturns.
In conclusion, the onset of the Great Depression was significantly influenced by misdirected government interventions. The agricultural boom and subsequent bust, coupled with Herbert Hoover's policies—including the establishment of the Federal Farm Board and the Reconstruction Finance Corporation as well as the enactment of the Smoot-Hawley Tariff Act—distorted economic realities. These actions, intended to bolster the economy, ironically contributed to the very crisis they sought to prevent, showcasing the delicate balance between policy and economic health.