How Herbert Hoover Put the “Great” in Great Depression

Common wisdom about the Great Depression seems to be that Herbert Hoover was a free market, laissez-faire kind of guy, who mistakenly decided to “do nothing” and let the economy work itself out...merely watching as it spiraled down the drain.

The rap on Hoover couldn’t be more wrong, says legendary libertarian economist Murray Rothbard. Hoover is actually the guy who made the Great Depression what it is!

Rothbard’s book America’s Great Depression is considered by many to be the finest account of what happened economically and politically in America between 1929 and 1932. (You can download a free copy here, courtesy of Mises.org).

He does a fine job of unraveling the mystery behind the Great Depression, which continues to perplex people to this day. Suddenly a hot topic, now that we’ve got a veritable depression of our own on our hands, people are scrambling to figure out what the heck happened 80 years ago!

Rothbard believes (as do I) that the severity of a depression is directly proportional to the amount of government intervention directed at “fixing things.” He contrasts America’s depression of 1920, which lasted less than a year, with the Great Depression, which just about dragged out into World War II.

America used to have depressions all the time. The 19th century and early 20th century are peppered with them. They were always short and sweet, because the US government was not yet large or powerful enough to really do anything about them. So the panics would come and quickly pass…excesses would be removed from the system…and the path would be clear for the next economic upturn.

The last time the US government pursued a mostly laissez-faire policy in handling a recession/depression was 1920-1921. Warren Harding was president - so it’s not hard to imagine he had a difficult time keeping his hands off the levers, because Harding was widely regarded as one of the least qualified presidents in American history. He’s the guy who Republicans believed just looked like a president – so they dressed him up, and sure enough, he was eventually elected into office.

Ironically, the man Harding appointed as Secretary of Commerce in March 1921 was none other than Herbert Hoover, who only accepted the position on the condition he’d be able to meddle in government economic policy. So Hoover quickly set to work in 1921 by mapping out boneheaded designs for public works projects and other central planning types of activities.

Fortunately for the US, the depression ended before Hoover was able enact any of his programs. But the stage was set for the big dance, coming up at the end of the decade.

When the stock market crashed on October 24, 1929, Hoover kicked into gear right away and started “doing stuff”. He ignored his laissez-faire Secretary of Treasury Mellon, who famously advised him to:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

Hoover honestly believed he could halt the depression freight train himself. He immediately called a series of conferences at the White House with top business leaders, in an effort to persuade them to maintain their wage rates and expand investments.

Hmmm – sounds eerily similar to the old “hair of the dog” approach we’re seeing today.

Rothbard writes that Hoover even phrased the purpose of these conferences as “the coordination of business and governmental agencies in concerted action,” which also seems to rhyme with today’s cries that capitalism can’t do it alone without government.

By the end of the year, Hoover was able to coerce the country’s leading industrialists into pledging to “maintain wage rates, expand construction, and share any reduced work.” Thus the invisible hand of the market was replaced by the iron fist of Uncle Sam.

While most understand the Great Depression as a deflationary time, Rothbard writes that it wasn’t for a lack of effort on the part of the Fed:

If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state.

The result? Green shoots!

Again from Rothbard:

President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates.

And by the end of 1929, Hoover had also:

• Urged an aggressive expansion of all state public works programs
• Instituted farm subsidies and price supports
• Enacted rules to discourage commodity speculators

Talk about a panicked two months!

In 1930, the train wreck continued, as mid-year saw the passing of the infamous Smoot-Hawley Tariff, one of the most economically damaging laws ever passed in the history of the world.

Cutting off international trade is at best a bad idea in good times, but a disastrous idea at a time of severe economic hardship.

And he wasn’t yet done. Hoover then set out to weaken bankruptcy laws, in order to prevent them, resulting in many “zombie” companies being propped up (Detroit, anyone?). He imposed limits on immigration and deported illegal aliens, in a misguided effort to help the unemployment rate by “reducing supply” in the available workforce.

Hoover continued his crusade to keep wage rates propped up – focusing on maximum employment. Employers’ were severely hamstrung in their ability to unload marginal employees. Laws were passed that dictated how many hours construction employees could work on federal projects.

In addition to these gems, he tried just about every remaining misguided economic move that we haven’t yet discussed. He went after short sellers. He restricted oil production in the name of conservation. He enacted one of the largest tax increases in the history of the US.

In conclusion, Hoover was a socialist bum who did not have a free market bone in his body. Kudos to Murray Rothbard for exposing him as the fraud that he is. I’ll leave you with this inane quote from Hoover in his doomed 1932 reelection campaign, which illustrates exactly how clueless this guy was:

[W]e might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.

 

Subscribe By Email

We now have a couple of email subscription options. You can subscribe to these weekly posts by entering your name and email into the form at the beginning of this post. Each week I'll ping you a copy of this post.

In addition, you can subscribe to all posts by using the form on the left side...just below the ads. This is managed by Feedburner - each time we post, you'll receive it via email.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. Is it (gasp!) time to short gold?
2. The Fourth Turning...Into the Greater Depression? (Also published by Seeking Alpha)
3. Jim Rogers' favorite country (surprise: not China!)
4. Chinese students laugh Tim Geithner out of town
5. Oil to natural gas ratio at historic extreme levels

Positions Update

Nice week but I have to admit – I’m starting to get quite cautious that some of these trends have played out.

First, I was stopped out of our Orange Juice position, taking a modest profit on this trade. OJ never managed to clear the $1.00, but it’s still cheap, so we’ll be keeping an eye on it. We were stopped out at our customary “15-day low” exit.

The dollar may be in the early stages of a rally, and that’s bearish for gold…which seasonally sucks in the summer anyway. Tomorrow, I’ll be shifting my wife’s entire 401K allocation out of the gold stock fund into short term treasuries, as I’m concerned that gold could be in a vulnerable short term spot here. The fund is already up 30% on the year, so it’s due for a pullback.

With the dollar rallying, that could give the Australian dollar problems, so I may look to hedge that position with another short, or possibly a long position in the dollar index.

Finally, soybeans have continued to move up on tight supply concerns and strong demand from China. I’ve been pyramiding some mini’s of this position – though it’s tough to say if this rally has more legs, or is due for a pullback. Many of the technical publications I follow have turned quite bearish on beans, so I remain cautious here.

Current Account Value: $33,798.87

Cashed out: $20,000.00

Total value: $53,798.87

Weekly return: 3.9%

2009 YTD return: -33.5% (Don't call it a comeback??)

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Economic Darwinism Cartoon by Chappatte

© Chappatte - www.globecartoon.com

Has George Soros Lost His Mind?

Reuters reporting on George Soros' testimony at the U.S. Conference of Mayors - whatever the hell that is:

Soros said the United States needed "radical and unorthodox policy measures" to prevent a repeat of the Great Depression of the early 20th century that include recapitalizing banks and writing down the country's accumulated debt.

Also, he said, it should create more money to offset the collapse of credit and then rapidly pull that cash out of the system when inflation emerges. The government would have to be very nimble in the timing of such moves, he said.

"If they are successful...the deflationary pressures will be replaced by the specter of inflation and the authorities will have to drain the excess money from the economy almost as quickly as they pumped it in. Of the two operations the second one is going to be, politically, even more difficult than the first," he said.

Is Soros - freaking - insane? Has this ever worked in history? Just once???

Hang on, it gets even better:

At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a "haphazard and capricious way" and "without proper planning," he said.

"Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money," Soros said.

I was stunned as well, when $700 billion was misspent by the bright bureaucrats in our Federal Government.

Let me ask you a question - last time you went to the Post Office to mail a package - how long did you wait?

Well those are the SAME DAMN BUREAUCRATS in charge of allocating this slush fund!

Why are people shocked when things our government does don't work out as planned? They NEVER work out as planned!

That's what the free market is for. (Check out John Stossel's excellent 20/20 piece about the limitations of government, and the power of the free market - highly recommended).

Now George Soros is not stupid - he's one of the most successful speculators of all-time.

So has he just lost his mind?

Have years of socialist dreaming finally penetrated and damaged his cranium?

Or is he just screwing with us common folk?

Inflation or Deflation - Which Will Prevail?

Battle of the Flations
By Bud Conrad
Chief Economist, The Casey Report

One of the most hotly debated topics among financial talking heads these days is, “Deflation or inflation, what is it going to be?”

There is no question that we are currently experiencing asset price deflation and economic slowing. But we, the editors of The Casey Report, see this as a transitional phase. In our analysis, the truly extraordinary and historic levels of government spending and bailouts being deployed to keep the economy afloat are certain to lead to inflation in the not-too-distant future.

While our long-term view remains solidly in the inflation camp, over the past four months, the U.S.’s financial problems have caused deflation in many important asset classes. Put another way, a reduction in asset prices amounting to about $14 trillion (in housing, equities, etc.) is bigger than the government’s countervailing actions of around $3 trillion -- the total, so far, arrived at by combining the measures taken by the Fed with the federal government bailouts.

But there are important differences between a sharp collapse in asset prices and the potentially leveraged stimulus packages.

The Fed’s actions, if taken in normal times, would be multiplied throughout the banking system as banks used the new money to increase their lending and, in so doing, leveraged the funds throughout the entire economy. This time around, however, while the Fed has been extremely accommodating to the banks, even going so far as to make direct loans to them, the effect is moderated. That’s because of tighter lending standards, the need to replenish capital, and the demise of many complex structures, which were previously available for securitizing and selling loans on to others.

As a result, the banking system as a whole is not responding to the stimulus. It can be thought of as pushing on a string. Simply, as large as the stimulus has been to date, it has not yet been enough to offset the effects of the economic collapse. The resulting deflationary pressure increases concern over a downward spiral in the economy.

Another way to view this is that consumers and businesses alike are now anticipating deflation, which makes saving and survival the primary goal (in an inflation, spending becomes the primary goal, unloading the money before it can lose value). Of course, a cutback in spending and demand drives down the price of things, at least temporarily.

But the longer-term expectation is that Bernanke’s assertion – an assertion now backed up by action – that the government can and will print new money to any extent needed is the more important force.

As long as there is evidence of serious economic collapse, it can be expected that the bailout programs will be ratcheted up. And, to the extent that the public expects deflation – and so businesses reduce prices to raise cash and reduce inventories – the wave of price inflation experienced in the spring of 2008 will be moderated. But within the seeds of that positive are the very big negatives that the government, seeing that its extraordinary money creation is not being evidenced in rising prices, will be emboldened to go even further.

This is of great importance because, unlike in the 1930s, there is no limitation on what the government can do, because there is no gold standard to enforce monetary discipline. Instead, the world is afloat on a sea of massive new government spending and credit facilities. After a lag, the stimulus will perform the expected actions of reinstating credit and debasing the currency. But never lose sight of the fact that the government is creating money out of thin air. Some call it bailouts, we would call it legal counterfeiting on an epic scale.

In the New Deal, FDR created the FDIC and guaranteed bank deposits, set minimum bank deposit rates, and brought the discount rate to almost 0%. He cut the dollar/gold exchange rate from $20.67 to $35 and confiscated gold; i.e., devalued the dollar by 40%.

While the beginning of the collapse from too much credit was parallel to the previous experience of the depression, the response today is different. The size of the monetary stimulus and the risk to the dollar from foreign holders -- who can also see the implications of the out-of-control deficits -- strongly argue for a return to inflation much sooner.

How much sooner? Impossible to say, but remember: deflationary or inflationary fears are not the independent agent that will determine whether or not we will see inflation (though, in the intervening phase, they will certainly be an important economic driver). The Federal Reserve is throwing everything it can at the financial markets to fight deflation. As you can see in the chart below, the Fed has doubled the size of its balance sheet since September.



On December 16, the Fed cut interest rates to a range of between a quarter of a point and zero. That is lower than ever in the 94 years of their existence. And they promised in the accompanying announcement to provide additional funds to “stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level… the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets.”

At this time individuals and companies alike are sensing deflation and, as a result, are raising cash… in the process deleveraging the extreme debt loads. That is causing downward pressure on asset prices and, soon, a serious contraction in the economy as more and more companies lay off workers and cancel spending. This will not be a happy holiday season. And it will be a long-term recession and maybe even a protracted depression.

But the fact of the extraordinary deficit spending is there for all to see and, over time, more and more will see it. And, more to the point, understand it. In fact, thanks to the Internet and always-there financial media, the shift in sentiment can happen almost on a dime. Slowly at first, and then faster, fears over inflation will return, but this time they will be well founded.

The economic downturn could be protracted, but that does not mean that the deflation will be protracted. Instead, once we are through this phase, we expect to see poor economic conditions, but against a backdrop of rising inflation. Stagflation is a word that remains in our vocabulary.

Inflation or deflation – whatever the current market trend, there is a way to play it. Every crisis contains opportunity as well as danger… and many of those who manage to mitigate the risk and grab the opportunity have made a fortune in times like these.

Making the trend your friend and riding the market “riptides” that can lead to exceptional returns in the double, triple or even quadruple digits is easier than you think… with a little help from experts who have been correctly predicting – and profiting from -- these riptides for years. Learn more here.

Editor's Note: You may also want to check out this article by MarketFolly about investing in inflationary vs. deflationary times.

The 12 Days of Bailouts - A YouTube Gem

On the first day of bailouts, we had to bail...



A great video by YouTube user ZINKpro!

Jim Rogers Covers His US Treasury Short Positions - For Now

A short Jim Rogers interview on Bloomberg - I believe from December 11, 2008. He says he has covered his short position in US Treasuries for the time being, because the trade was going against him.

He's waiting to short them again, and describes US Treasuries as "the last bubble left."

Other thoughts from Jim:

• It's idiotic for Bernanke to purchase long-dated US government bonds.
  
• Let the auto companies go into bankruptcy.
• "The government has been taking the assets away from the competent people and giving them to the incompetent people...that's bad economics and bad morality."
• These bailouts will be a "disaster for America", leading to the demise of the dollar, higher interest rates, and higher inflation.