Mises Daily

Hoover’s Attack on Laissez-Faire

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses.

Moreover, a drastic cut in the government budget—both in taxes and expenditures—will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects.

Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century.

Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America’s first great depression, 1819, when the federal government’s only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments, which periodically permitted insolvent banks to continue in operation without paying their obligations.1   In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year—in what Dr. Benjamin M. Anderson has called “our last natural recovery to full employment.”

Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the “Hoover New Deal.” For if we define “New Deal” as an antidepression program marked by extensive governmental economic planning and intervention—including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works)—Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.

Hoover’s role as founder of a revolutionary program of government planning to combat depression has been unjustly neglected by historians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover’s tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market. To portray the interventionist efforts of the Hoover administration to cure the depression, we may quote Hoover’s own summary of his program, during his presidential campaign in the fall of 1932:

We 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…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered…. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for … “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom…. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.2

The Development of Hoover’s Interventionism: Unemployment

Hoover, of course, did not come upon his interventionist ideas suddenly. It is instructive to trace their development and the similar development in the country as a whole, if we are to understand clearly how Hoover could so easily, and with such nationwide support, reverse the policies that had ruled in all previous depressions.

Herbert Clark Hoover was very much the “forward-looking” politician. We have seen that Hoover pioneered in attempts to intimidate investment bankers in placing foreign loans. Characteristic of all Hoover’s interventions was the velvet glove on the mailed fist: i.e., the businessmen would be exhorted to adopt “voluntary” measures that the government desired, but implicit was the threat that if business did not “volunteer” properly, compulsory controls would soon follow.

When Hoover returned to the United States after the war and a long stay abroad, he came armed with a suggested “Reconstruction Program.” Such programs are familiar to the present generation, but they were new to the United States in that more innocent age. Like all such programs, it was heavy on government planning, which was envisaged as “voluntary” cooperative action under “central direction.”3   The government was supposed to correct “our marginal faults”—including undeveloped health and education, industrial “waste,” the failure to conserve resources, the nasty habit of resisting unionization, and seasonal unemployment.

Featured in Hoover’s plan were increased inheritance taxes, public dams, and, significantly, government regulation of the stock market to eliminate “vicious speculation.” Here was an early display of Hoover’s hostility toward the stock market, a hostility that was to form one of the leitmotifs of his administration.4 Hoover, who to his credit has never pretended to be the stalwart of laissez-faire that most people now consider him, notes that some denounced his program as “radical”—as well they might have.

So “forward-looking” was Hoover and his program that Louis Brandeis, Herbert Croly of the New Republic, Colonel Edward M. House, Franklin D. Roosevelt, and other prominent Democrats for a while boomed Hoover for the presidency.5

Hoover continued to expound interventionism in many areas during 1920. Most relevant to our concerns was the conference on labor-management relations that Hoover directed from 1919 to 1920, on appointment by President Wilson and in association with Secretary of Labor William B. Wilson, a former official of the United Mine Workers of America. The conference—which included “forward-looking” industrialists like Julius Rosenwald, Oscar Straus, and Owen D. Young, labor leaders, and economists like Frank W. Taussig—recommended wider collective bargaining, criticized “company unions,” urged the abolition of child labor, and called for national old-age insurance, fewer working hours, “better housing,” health insurance, and government arbitration boards for labor disputes. These recommendations reflected Hoover’s views.6

Hoover was appointed Secretary of Commerce by President Harding in March 1921, under pressure from the left wing of the Republican Party, led by William Allen White and Judge Nathan Miller of New York. (Hoover was one of the first of the modern breed of politician, who can find a home in either party.) We have seen that the government pursued a largely laissez-faire policy in the depression of 1920–1921, but this was not the doing of Herbert Hoover. On the contrary, he “set out to reconstruct America.”7 He only accepted the appointment on the condition that he would be consulted on all economic policies of the federal government. He was determined to transform the Department of Commerce into “the economic interpreter to the American people (and they badly need one).”8

Hardly had Hoover assumed office when he began to organize an economic conference and a committee on unemployment. The committee established a branch in every state having substantial unemployment, along with subbranches in local communities and mayors’ emergency committees in 31 cities.9 The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.

As Hoover recalls:

We developed cooperation between the federal, state, and municipal governments to increase public works. We persuaded employers to “divide” time among their employees so that as many as possible would have some incomes. We organized the industries to undertake renovation, repair, and, where possible, expand construction.10

Standard Oil of New Jersey announced a policy of laying off its older employees last, and it increased its repairs and production for inventory; US Steel also invested $10 million in repairs immediately upon conclusion of the conference.11 In short, the biggest businesses were the first to agree.

Happily, the depression was about over by the time these measures could take effect, but an ominous shadow had been cast over any future depression, a shadow that would grimly materialize when the 1929 crash arrived. Once again, these measures bore the characteristic Hoover stamp; the government compulsion and planning were larded with the rhetoric of “voluntary cooperation.” He spoke of these and other suggested measures as “mobilization of cooperative action of our manufacturers and employers, of our public bodies and local authorities.” And there came into use the now all too familiar war analogy: “An infinite amount of misery could be saved if we have the same spirit of spontaneous cooperation in every community for reconstruction that we had in war.”

While the government did not greatly intervene in the 1920–1921 recession, there were enough ominous seeds of the later New Deal. In December 1920, the War Finance Corporation was revived as an aid to farm exports, and a $100 million Foreign Trade Financial Corporation was established. Farm agitation against short-selling led to the Capper Grain Futures Act, in August 1921, regulating trading on the grain exchanges. Furthermore, on the state level, New York passed rent laws, restricting the eviction rights of landlords; Kansas created an Industrial Court regulating all key industries as “public utilities”; and the Non-Partisan League conducted socialistic experiments in North Dakota.12

Perhaps the most important development of all, however, was the President’s Conference on Unemployment, called by Harding at the instigation of the indefatigable Herbert Hoover. This was probably the most fateful omen of antidepression policies to come. About 300 eminent men in industry, banking, and labor were called together in September 1921 to discuss the problem of unemployment. President Harding’s address to the conference was filled with great good sense and was almost the swan song of the Old Order’s way of dealing with depressions. Harding declared that liquidation was inevitable and attacked governmental planning and any suggestion of Treasury relief. He said, “The excess stimulation from that source is to be reckoned a cause of trouble rather than a source of cure.”13

To the conference members, it was clear that Harding’s words were mere stumbling blocks to the wheels of progress, and they were quickly disregarded. The conferees obviously preferred Hoover’s opening speech, to the effect that the era of passivity was now over; in contrast to previous depressions, Hoover was convinced, the government must “do something.”14 The conference’s aim was to promulgate the idea that government should be responsible for curing depressions, even if the sponsors had no clear idea of the specific things that government should do. The important steps, in the view of the dominant leaders, were to urge the necessity of government planning to combat depressions and to bolster the idea of public works as a depression remedy.15 The conference very strongly and repeatedly praised the expansion of public works in a depression and urged coordinated plans by all levels of government.16 Not to be outdone by the new administration, former President Wilson, in December, added his call for a federal public-works-stabilization program.

The extreme public-works agitators were disappointed that the conference did not go far enough. For example, the economist William Leiserson had thought that a Federal Labor Reserve Board “would do for the labor market what the Federal Reserve Board did for the banking interests.” But the wiser heads saw that they had made a great gain. As a direct result of Hoover’s conference, twice as many municipal bonds for public works were floated in 1921 and 1922 as in any previous year; federal highway grants-in-aid to the states totaled $75 million in the autumn of 1921, and American opinion was aroused on the entire subject.

It was no accident that the conference had arrived at its interventionist conclusions. As usually happens in conferences of this type, a small group of staff men, along with Herbert Hoover, actually prepared the recommendations that the illustrious front men duly ratified.17 Secretary of the crucial Public Works Committee of the conference was Otto Tod Mallery, for a long time the nation’s leading advocate of public-works programs in depressions. Mallery was a member and guiding spirit of the Pennsylvania State Industrial Board and Secretary of the Pennsylvania Emergency Public Works Commission, which had pioneered in public-works planning, and Mallery’s resolutions thoughtfully pointed to the examples of Pennsylvania and California as beacon lights for the federal government to follow.18

Mallery was one of the leading spirits in the American Association for Labor Legislation (AALL) an organization of eminent citizens and economists devoted to the promotion of government intervention in the fields of labor, unemployment, and welfare. The Association had held the first national unemployment conference in early 1914. Now, its executive director, John B. Andrews, boasted that the presidential conference’s recommendations followed the standard recommendations formulated by the AALL in 1915. These standard recommendations featured public works and emergency public relief, at the usual hours and wage rates—the wage rates of the boom period were supposed to be maintained.19 Neither was the conference’s following of the AALL line a coincidence. Aside from Mallery’s critical role, the conference also employed the expert knowledge of the following economists, all of whom were officials of the AALL: John B. Andrews, Henry S. Dennison, Edwin F. Gay, Samuel A. Lewisohn, Samuel McCune Lindsay, Wesley C. Mitchell, Ida M. Tarbell, Mary Van Kleeck, and Leo Wolman.20

It seems clear that the businessmen at the conference were not supposed to mold policy; their function was to be indoctrinated with the Hoover-AALL line and then to spread the interventionist gospel to other business leaders. Andrews singled out for particular praise in this regard Joseph H. Defrees, of the United States Chamber of Commerce, who appealed to many business organizations to cooperate with the mayors’ emergency committees, and generally to accept “business responsibility” to solve the unemployment problem. President Samuel Gompers of the American Federation of Labor (AF of L) also hailed the widespread acceptance by industry of its “responsibility” for unemployment, as an outcome of this conference.

Hoover did his best to intervene in the recession, attempting also to stimulate home construction and urging banks to finance more exports. Fortunately, however, Harding and the rest of the cabinet were not convinced of the virtues of governmental depression “remedies.” But eight years later, Hoover was finally to have his chance. As Lyons concludes, “A precedent for federal intervention in economic depression was set, rather to the horror of conservatives.”21

It is, of course, a sociological law that a government bureau, once launched, never dies, and the conference was true to this law. The conference resolved itself into three research committees, run by a staff of experts, with Hoover in overall command. One project bore fruit in Leo Wolman’s Planning and Control of Public Works, a pro–public works study published in 1930. A second committee published a study on Seasonal Operation in the Construction Industry, in 1924, in cooperation with the Division of Building and Housing of the Department of Commerce. This work urged seasonal stabilization of construction, and was in part the result of a period of propaganda activity by the American Construction Council, a trade association headed by Franklin Delano Roosevelt. Its foreword was written by Herbert Hoover.22 The most important project was a study of Business Cycles and Unemployment, published in 1923.

Hoover invited the National Bureau of Economic Research (headed by Wesley C. Mitchell) to make a “fact-finding” study of the problems of forecasting and control of business cycles, and then appointed a Committee on Business Cycles to draft policy recommendations for the report. Chairman of the committee was Owen D. Young, and other members included Edward Eyre Hunt, who had been secretary of the President’s Conference, Joseph Defrees, Mary Van Kleeck, Clarence Woolley, and Matthew Woll of the AF of L. Funds for the project were considerately supplied by the Carnegie Corporation. Wesley C. Mitchell, of the National Bureau and AALL, planned and directed the report, which included interventionist chapters by Mallery and Andrews on public works and unemployment benefits, and by Wolman on unemployment insurance. While the National Bureau was supposed to do only fact-finding, Mitchell, in discussing his report, advocated “social experimentation.”23

Meanwhile, Hoover had not been idle on the more direct legislative front. Senator W.S. Kenyon of Iowa, in late 1921, introduced a bill supported by Hoover, embodying recommendations of the conference and specifically requiring a public-works-stabilization program. In the December 1921 hearings, the Kenyon Bill was supported by numerous leading economists, as well as by the American Federation of Labor, the American Engineering Council (of which Hoover had just been named president), and the United States Chamber of Commerce. One of the supporters was Wesley C. Mitchell. The bill never came to a vote, however, largely due to healthy senatorial skepticism based on laissez-faire ideas.

The next public-works-stabilization bill before Congress was the Zihlman Bill in the House. This was promoted by the National Unemployment League, formed in 1922 for that purpose. Hearings were held in the House Labor Committee in February 1923. Hoover backed the proposal, but it failed of adoption.

Finally, Hoover presented the report on business cycles and unemployment to the Congress, and strongly urged a public-works program in depressions. Later, in 1929, Hoover’s Committee on Recent Economic Changes would also support a public-works program.

In 1924, the AALL continued its agitation. It participated in a national conference proposing public-works planning. The conference was called by the Federated American Engineering Societies in January. In 1923, Wisconsin and Massachusetts were persuaded to adopt a stabilizing public-works program. Massachusetts was directly swayed by testimony from the ubiquitous Andrews and Mallery. These state programs were never translated into effective action, but they did indicate the developing climate. In January 1925, Hoover had the satisfaction of seeing President Coolidge adopt his position. Addressing the Associated General Contractors of America (a group that stood to gain by a government building program), Coolidge called for public-works planning to stabilize depressions. Senators George H. Pepper and James Couzens tried to pass public-works-planning legislation in 1925 and 1926, but they failed, along with later attempts by Senator Wesley Jones, who submitted bills that had been drafted in Hoover’s Department of Commerce. The Republican Senate was the most recalcitrant, and one Pepper Bill was filibustered to death there. Even favorable reports by its Commerce Committee could not sway the Senate. By this time, not only Hoover and Coolidge, but also Secretary Mellon, the Democratic Party in 1924, and later Governor Alfred E. Smith of New York, had endorsed the public-works program. In May 1928, Senator Robert F. Wagner (D, NY) introduced three bills for comprehensive public-works planning, including the creation of an employment stabilization board, but the plan was not considered by Congress.24

After Hoover was elected president, he became more circumspect in presenting his views, but he carried on the fight with renewed vigor. His technique was to “leak” the “Hoover Plan” to trusted associates, who would obviously be presenting Hoover’s views. He chose as his vehicle Governor Ralph Owen Brewster of Maine. Brewster presented a public-works plan to the Conference of Governors in late 1928, and waxed eloquent about the plan as designed to “prevent depressions.”25

His use of the term “Road to Plenty” was hardly a coincidence, for Hoover had adopted the plan of Messrs. Foster and Catchings, which had recently been outlined in their famous book, The Road to Plenty (1928). The authors had submitted the plan to Brewster, and, after Hoover’s endorsement, Brewster brought Professor William T. Foster along to the Governors’ Conference as his technical advisor. Foster and Catchings, bellwethers of inflation and the bull market and leading underconsumptionists, had been closely involved in the public-works agitation. Foster was director of the Pollak Foundation for Economic Research, founded by investment banker Waddill Catchings. The pair had published a series of very popular books during the 1920s, agitating for such panaceas as public works and monetary inflation.26

Although seven or eight governors were enthusiastic about the Hoover-Foster-Catchings Plan, the conference tabled the idea. A large part of the press hailed the plan in extravagant terms, as “prosperity insurance,” a “prosperity reserve,” or as a “pact to outlaw depression”; while more conservative organs properly ridiculed it as a chimerical and socialistic effort to outlaw the law of supply and demand. It was not surprising that William Green of the AF of L hailed the plan as the most important announcement on wages and employment in a decade, or that the AF of L’s John P. Frey announced that Hoover had now accepted the old AF of L theory that depressions are caused by underconsumption and low wages.27 The press reported that “labor is jubilant, because leaders believe that the next President has found … a remedy for unemployment which, at least in its philosophy and its groundwork, is identical with that of labor.”28

The closeness of Foster and Catchings to Hoover is again demonstrated by the detailed account of their own plan that they published in April 1929. In an article entitled “Mr. Hoover’s Plan: What It Is and What It Is Not—A New Attack on Poverty,” they wrote authoritatively that Hoover should wield a stabilization public-works reserve, not of $150 million, as had often been mentioned in previous years, but of the gigantic sum of $3 billion. This plan would iron out prices and the business cycle, and stabilize business. At last, scientific economics was to be wielded as a weapon by an American president: “The Plan … is business guided by measurements instead of hunches. It is economics for an age of science—economics worthy of the new President.”29

The Development of Hoover’s Interventionism: Labor Relations

We cannot fully understand Hoover’s disastrous interference in the labor market during the depression without tracing the development of his views and actions on the labor front during the 1920s. We have seen that his Reconstruction Program and his Economic Conference of 1920 praised collective bargaining and unionism. In 1920, Hoover arranged a meeting of leading industrialists with “advanced views” on labor relations to try (unsuccessfully) to persuade them to “establish liaison” with the American Federation of Labor.30 From 1919 through 1923, Hoover tried to persuade private corporations to insure the uninsurable by adopting unemployment insurance, and in 1925 he praised the American Federation of Labor as having “exercised a powerful influence in stabilizing industry.” He also favored the compulsory unemployment of a child labor amendment, which would have lowered the national product, and raised labor costs as well as the wages of competing adult workers.

Most important of Hoover’s activities in the labor field was his successful war against United States Steel and its chairman, Judge Elbert H. Gary, a war conducted as a “skillful publicity campaign” (in the words of a Hoover admirer) against “barbaric” hours of work in the steel industry.31 The success of this battle made it much easier later on to persuade businessmen to go along with his labor policies during the 1929 depression. Hoover had decided that the 12-hour day in the steel industry must be eradicated and replaced by the 8-hour day. He persuaded Harding, lapsing from his usual laissez-faire instincts, to hold a conference of steel manufacturers in May 1922, at which Harding and Hoover called on the magnates to eliminate the 12-hour day. An admiring biographer notes with satisfaction that Hoover made the steel leaders “squirm.”32 It was of course easy for Harding and Hoover, far removed from the necessity of meeting a payroll or organizing production, to tell other people how long and under what conditions they should work. Hoover was supported by such “enlightened” steelmen as Alexander Legge and Charles R. Hook, but bitterly opposed by other leaders like Charles M. Schwab, and of course by Judge Gary, chairman of the board of US Steel and president of the American Iron and Steel Institute. The war was on.

The steel agitation, it should be pointed out, had not been begun by Hoover. It originated back in September 1919, when Gary refused to engage in collective bargaining with a workers’ union. The workers struck on that issue, and the strike was led by Communist leader William Z. Foster. By the time the strike had failed, in January 1920, public opinion, properly regarding the strike as Bolshevik inspired, was squarely on the side of US Steel. By this time, however, the Interchurch World Movement had appointed a Commission of Inquiry into the strike; the commission issued a report favorable to the strikers in July 1920, and thereby initiated the 8-hour day agitation.33 The report started a propaganda war, with the nation’s leftists attempting to change the whole temper of public opinion. The Reverend A.J. Muste, the Socialist New York Call, Labor, and The Nation backed the report, while business associations strongly attacked the inquiry. The latter included the National Association of Manufacturers, the National Civic Federation, the Wall Street Journal, and others. Many religious papers, however, were persuaded by the prestige of the committee (a prestige in religion that somehow carried over to secular matters) to change their previous views and to line up on the antisteel side.

It was at this critical point in the battle that Hoover entered the fray and persuaded President Harding to join him. Hoover “deliberately broke the story” of the unsuccessful private meeting with Gary, Schwab, and the others to the press. He told the press that President Harding was “attempting to persuade industry to adopt a reasonable working day.”34 Thus did the government mobilize public opinion on the side of the union. Hoover managed to have the national Engineering Societies—effectively dominated by Hoover—issue a report (again outside of their competence) endorsing the 8-hour day in November 1922. Hoover eulogized the report, wrote the introduction, and persuaded Harding to sign it.

Under the presidential pressure, Judge Gary appointed a committee of the steel industry, headed by himself, to study the question. The committee reported on May 25, 1923, unanimously rejecting the 8-hour day demands. US Steel also issued a reply to the Interchurch Report, written by Mr. Marshall Olds, and endorsed by the prominent economist, Professor Jeremiah W. Jenks. Abuse rained down on the steel industry from all sides. Forgotten were the arguments used by US Steel, e.g., that the steel workers preferred the longer 12-hour day because of the increased income, and that production would suffer under an 8-hour schedule.35

This and other arguments were swept away by the wave of emotionalism whipped up over the issue. The forces of the Social Gospel hurled anathemas. “Social Justice” and “Social Action” committees of Protestant, Catholic, and Jewish organizations set up a clamor on issues about which they knew virtually nothing. Attaching a quantitative codicil to the qualitative moral codes of the Bible, they did not hesitate to declare that the 12-hour day was “morally indefensible.” They did not elaborate whether it had suddenly become “morally indefensible” or whether it, and even longer work days, had also been morally wicked throughout earlier centuries. If the latter, it was certainly strange that countless preceding generations of churchmen had overlooked the alleged sin; if the former, then a curious historical relativism was now being mingled with the presumably eternal truths of the Bible.

The American Association for Labor Legislation of course entered the fray, and threatened federal maximum-hour legislation if the steel industry did not succumb to its imperious demands. But the most effective blow was a stern public letter of rebuke sent to Gary by President Harding on June 18, written for the president by Hoover. Faced by Harding’s public requests and demands, Gary finally surrendered in July, permitting Hoover to write the notice of triumph into Harding’s Independence Day address.

The Hoover-Harding victory over US Steel effectively tamed industry, which, faced by this lesson, no longer had the fight to withstand a potent combination of public and governmental pressures.36

Nor did this exhaust Hoover’s labor interventionism during the 1920s. Hoover played a major role in fostering railway unions, and in foisting upon the railroad industry the Railway Labor Act—America’s first permanent incursion of the federal government into labor-management relations. The railroad problem had begun in World War I, when the federal government seized control of the nation’s rails. Run by Secretary of the Treasury McAdoo, the government’s policy was to encourage unionization. After the war was over, the railway unions tried their best to perpetuate this bastion of socialism, and advocated the Plumb Plan, which called for joint operation of the railroads by employers, unions, and the government.

The railroads were returned to private owners in 1920, but Congress gave a dangerous sop to the unions by setting up a Railroad Labor Board, with tripartite representation, to settle all labor disputes. The board’s decisions did not have the force of law, but they could exert an undue pressure on public opinion. The unions were happy with this arrangement, until the government representatives saw the light of economic truth during the depression of 1921, and recommended reductions in wage rates. The nonoperating railway unions conducted a nationwide strike in defiance of the proposed reduction in the summer of 1922. While Attorney General Daugherty acted ably in support of person and property by obtaining a federal injunction against union violence, the “horrified” Mr. Hoover, winning Secretary of State Hughes to his side, persuaded Harding to force Daugherty to remove the injunction. Hoover also intervened privately but insistently to try to wring pro-union concessions from the railroads.

After the unions lost their strike, they determined to rewrite the law so that they could become established with the help of federal coercion. From 1923 on, the unions fought for a compulsory arbitration law. They achieved this goal with the Railway Labor Act of 1926, which, in effect, guaranteed collective bargaining to the railway unions. The bill was drafted by union lawyers Donald Richberg and David E. Lilienthal, and also by Herbert Hoover, who originated the idea of the Railway Labor Mediation Board. Seeing the growing support for such a law and lured by the promised elimination of strikes, the bulk of the railroad industry surrendered and went along with the bill. The Railway Labor Act—the first giant step toward the collectivization of labor relations—was opposed by only a few far-sighted railroads, and by the National Association of Manufacturers.37

Even more mischievous than Hoover’s pro-union attitude was his adoption of the new theory that high wage rates are an important cause of prosperity. The notion grew during the 1920s that America was more prosperous than other countries because her employers generously paid higher wage rates, thus insuring that workers had the requisite purchasing power to buy industry’s products. While high real wage rates are actually the consequence of greater productivity and capital investment, this theory put the cart before the horse by claiming that high wage rates were the cause of high productivity and living standards. It followed, of course, that wage rates should be maintained, or even raised, to stave off any threatening depression. Hoover began championing this theory during the Unemployment Conference of 1921. Employers on the manufacturing committee wanted to urge lowering wage rates as a cure for unemployment, but Hoover successfully insisted on killing this recommendation.38 By the mid-1920s, Hoover was trumpeting the “new economics” and attacking the “old economics” that resisted the new dispensation. In a speech on May 12, 1926, Secretary Hoover spread the gospel of high wage rates that was to prove so disastrous a few years later:

not so many years ago—the employer considered it was in his interest to use the opportunities of unemployment and immigration to lower wages irrespective of other considerations. The lowest wages and longest hours were then conceived as the means to obtain lowest production costs and largest profits …. But we are a long way on the road to new conceptions. The very essence of great production is high wages and low prices, because it depends upon a widening … consumption, only to be obtained from the purchasing-power of high real wages and increased standards of living.39

Hoover was not alone in celebrating the “new economics.” The National Industrial Conference Board reported that, while during the 1920–1921 depression, wage rates fell by 19 percent in one year, the high-wage theory had taken hold from then on. More and more people adopted the theory that wage-cutting would dry up purchasing power and thus prolong the depression, while wage rates held high would quickly cure business doldrums. This doctrine, allied with the theory that high wage rates cause prosperity, was preached by many industrialists, economists, and labor leaders throughout the 1920s.40 The Conference Board reported that “Much was heard of the dawn of a new era in which major business depressions could have no place.” And Professor Leo Wolman has stated that the prevailing theory during the 1920s was that “high and rising wages were necessary to a full flow of purchasing power and, therefore, to good business.”41

As the final outgrowth of the famous conference of 1921, Hoover’s Committee on Recent Economic Changes issued a general multivolume report on the American economy in 1929. Once again, the basic investigations were made by the National Bureau. The committee did not at all foresee the Great Depression. Instead, it hailed the price stability of the 1920s and the higher wages. It celebrated the boom, little realizing that this was instead its swan song: “with rising wages and relatively stable prices we have become consumers of what we produce to an extent never before realized.” In the early postwar period, the committee opined, there were reactionary calls for the “liquidation” of labor back to prewar standards. But, soon, the “leaders of industrial thought” came to see that high wages sustained purchasing power, which in turn sustained prosperity.

They began consciously to propound the principle of high wages and low costs as a policy of enlightened industrial practice. This principle has since attracted the attention of economists all over the world—its application on a broad scale is so novel.42

This change in the industrial climate, according to the committee, came about in a few short years, largely due to the influence of the Conference on Unemployment. By the fall of 1926, steel magnate Eugene Grace was already heralding the new dispensation in the Saturday Evening Post.43

The conclusions of the Hoover-appointed economic committee were ominous in their own right. “To maintain the dynamic equilibrium” of the 1920s, it declared, leadership must be at hand to provide more and more “deliberate public attention and control.” In fact, “research and study, the orderly classification of knowledge … well may make complete control of the economic system a possibility.” To maintain the equilibrium, “We … [must] develop a technique of balance,” the technique to be supplied by economists, statisticians, and engineers, all “working in harmony together.”

And so, President Herbert Hoover, on the eve of the Great Depression, stood ready to meet any storm warnings on the business horizon.44 Hoover, the “great engineer,” stood now armed on many fronts with the mighty weapons and blueprints of a “new economic science.” Unfettered by outworn laissez-faire creeds, he would use his “scientific” weapons boldly, if need be, to bring the business cycle under governmental control.

Hoover did not fail to employ promptly and vigorously his “modern” political principles, or the new “tools” provided him by “modern” economists. And, as a direct consequence, America was brought to her knees as never before. Yet, by an ironic twist of fate, the shambles that Hoover abandoned when he left office was attributed, by Democratic critics, to his devotion to the outworn tenets of laissez-faire.

This article is excerpted from chapter 7 of America’s Great Depression.

  • 1For an appreciation of the importance of this fact for American monetary history, see Vera C. Smith, The Rationale of Central Banking (London: P.S. King and Son, 1936).
  • 2From his acceptance speech on August 11, and his campaign speech at Des Moines on October 4. For full account of the Hoover speeches and antidepression program, see William Starr Myers and Walter H. Newton, The Hoover Administration (New York: Scholarly Press, 1936), part 1; William Starr Myers, ed., The State Papers of Herbert Hoover, (New York. 1934), vols. 1 and 2. Also see Herbert Hoover, Memoirs of Herbert Hoover (New York: Macmillan, 1937), vol. 3.
  • 3See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 14, p. 27.
  • 4Hoover, Memoirs, vol. 2, p. 29. Hoover’s evasive rhetoric is typical: “I insisted that these improvements could be effected without government control, but the government should cooperate by research, intellectual leadership [sic], and prohibitions upon the abuse of power.”
  • 5Cf. Arthur M. Schlesinger, Jr., The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin, 1957), pp. 81ff.; Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), pp. 24ff.
  • 6Hoover records that the “extreme right” was hostile to these proposals— and understandably so—and notably the Boston Chamber of Commerce. Also see Eugene Lyons, Our Unknown Ex-President (New York: Doubleday, 1948), pp. 213–14.
  • 7Hoover to Wesley C. Mitchell, July 29, 1921. Lucy Sprague Mitchell, Two Lives (New York: Simon and Schuster, 1953), p. 364.
  • 8Warren, Herbert Hoover and the Great Depression, p. 26.
  • 9See Hoover, Memoirs, vol. 2; Warren, Herbert Hoover and the Great Depression; and Lloyd M. Graves, The Great Depression and Beyond (New York: Brookmire Economic Service, 1932), p. 84.
  • 10Hoover, Memoirs, vol. 2, pp. 41–42.
  • 11See Joseph H. McMullen, “The President’s Unemployment Conference of 1921 and its Results” (unpublished M.A. thesis, Columbia University, 1922), p. 33.
  • 12See Graves, The Great Depression and Beyond.
  • 13See E. Jay Howenstine, Jr., “Public Works Policy in the Twenties,” Social Research (December, 1946): 479–500.
  • 14See Lyons, Our Unknown Ex-President, p. 230.
  • 15In reality, public works only prolong the depression, aggravate the malinvestment problem, and intensify the shortage of savings by wasting more capital. They also prolong unemployment by bolstering wage rates. See Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 792–94.
  • 16The payment of charity wages as high as market rates began in the depression of 1893; public works as a depression remedy started on a municipal scale in the recession of 1914–1915. The secretary of Mayor John Purroy Mitchell’s New York Committee on Unemployment urged public works in 1916, and Nathan J. Stone, chief statistician of the US Tariff Board, urged a national public works and employment reserve in 1915. Immediately after the war, Governor Alfred E. Smith of New York and Governor Frank O. Lowden of Illinois urged a national public-works-stabilization program. See Raphael Margolin, “Public Works as a Remedy for Unemployment in the United States” (unpublished M.A. thesis, Columbia University, 1928).
  • 17McMullen, “The President’s Unemployment Conference of 1921 and its Results,” p. 16.
  • 18Pennsylvania had established the first public-works-stabilization program in 1917, largely inspired by Mallery; it was later repealed. Mallery had also been made head of a new Division of Development of Public Works by States and

    Cities During the Transition Period, in the Wilson administration. See Dorfman, The Economic Mind in American Civilization,” vol. 4, p. 7.
  • 19See John B. Andrews, “The President’s Unemployment Conference— Success or Failure?” American Labor Legislation Review (December, 1921): 307–10. Also see “Unemployment Survey,” in ibid, pp. 211–12.
  • 20American Labor Legislation Review (March, 1922): 79. Other officials of the AALL included: Jane Addams, Thomas L. Chadbourne, Professor John R. Commons, Professor Irving Fisher, Adolph Lewisohn, Lillian Wald, Felix M. Warburg, Woodrow Wilson, and Rabbi Stephen S. Wise.
  • 21Lyons, Our Unknown Ex-President, p. 230.
  • 22The American Construction Council was formed in response to the hounding of the New York construction industry by state and federal authorities during the depression of 1920–1921. The governments charged the industry with “price-fixing” and “excessive profits.” Hoover and Roosevelt together formed the council in the summer of 1922, to stabilize and organize the industry. The aim was to cartelize construction, impose various codes of operation and “ethics,” and to plan the entire industry. Franklin Roosevelt, as president of the council, took repeated opportunity to denounce profit seeking and rugged individualism. The “codes of fair practice” were Hoover’s idea. See Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1956), pp. 102ff.
  • 23Wesley C. Mitchell, “Unemployment and Business Fluctuations,” American Labor Legislation Review (March, 1923): 15–22.
  • 24The following economists, businessmen, and other leaders had by now served as officers of the American Association for Labor Legislation, in addition to those named above: Ray Stannard Baker, Bernard M. Baruch, Mrs. Mary Beard, Joseph P. Chamberlain, Morris Llewellyn Cooke, Fred C. Croxton, Paul H. Douglas, Morris L. Ernst, Herbert Feis, S. Fels, Walton H. Hamilton, William Hard, Ernest M. Hopkins, Royal W. Meeker, Broadus Mitchell,
    William F. Ogburn, Thomas I. Parkinson, Mrs. George D. Pratt, Roscoe Pound, Mrs. Raymond Robins, Julius Rosenwald, John A. Ryan, Nahum I. Stone, Gerard Swope, Mrs. Frank A. Vanderlip, Joseph H. Willits, and John G. Winant.
  • 25Ralph Owen Brewster, “Footprints on the Road to Plenty—A Three Billion Dollar Fund to Stabilize Business,” Commercial and Financial Chronicle (November 28, 1928): 25–27.
  • 26The Foster-Catchings Plan called for an organized public-works program of $3 billion to iron out the business cycle and stabilize the price level. Individual initiative, the authors decided, may be well and good, but in a situation of this sort “we must have collective leadership.” William T. Foster and Waddill Catchings, The Road to Plenty (Boston: Houghton Mifflin, 1928), p. 187. For a brilliant critique of the underconsumptionist theories of Foster and Catchings, see F.A. Hayek, “The ‘Paradox’ of Savings,” in Profit, Interest, and Investment (London: Routledge and Kegan Paul, 1939), pp. 199–263.
  • 27See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 349–50.
  • 28“Hoover’s Plan to Keep the Dinner-Pail Full,” Literary Digest (December 8, 1928): 5–7.
  • 29William T. Foster and Waddill Catchings, “Mr. Hoover’s Plan—What It Is and What It Is Not—The New Attack on Poverty,” Review of Reviews (April, 1929): 77–78. For a laudatory survey of Hoover’s pro–public works views in the 1920s, by an official of the AALL, see George H. Trafton, “Hoover and Unemployment,” American Labor Legislation Review (September, 1929): 267ff.; and idem, “Hoover’s Unemployment Policy,” American Labor Legislation Review (December, 1929): 373ff.
  • 30Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), p. 147. As early as 1909, Hoover had called unions “proper antidotes for unlimited capitalistic organizations,” ibid., p. 250.
  • 31Warren, Herbert Hoover and the Great Depression, p. 28.
  • 32Lyons, Our Unknown Ex-President, p. 231.
  • 33See Marshall Olds, Analysis of the Interchurch World Movement Report on the Steel Strike (New York: G.P. Putnam and Sons, 1922), pp. 417ff.
  • 34Lyons, Our Unknown Ex-President, p. 231.
  • 35Also forgotten was the fact that wages were involved in the struggle, as well as hours. The workers wanted shorter hours with a “living wage,” or as the Inquiry Report put it, “a minimum comfort wage”—in short, they wanted higher hourly wage rates. See Samuel Yellen, American Labor Struggles (New York: S.A. Russell, 1956), pp. 255ff.
  • 36On the 12-hour day episode, see Frederick W. MacKenzie, “Steel Abandons the 12-Hour Day,” American Labor Legislation Review (September, 1923): 179ff.; Hoover, Memoirs, vol. 2, pp. 103–04; and Robert M. Miller, “American Protestantism and the Twelve-Hour Day,” Southwestern Social Science Quarterly (September, 1956): 137–48. In the same year, Governor Pinchot of Pennsylvania forced the anthracite coal mines of that state to adopt the eight-hour day.
  • 37For a pro-union account of the affair, see Donald R. Richberg, Labor Union Monopoly (Chicago: Henry Regnery, 1957), pp. 3–28; also see Hoover, Memoirs, vol. 2.
  • 38See McMullen, “The President’s Unemployment Conference of 1921 and its Results,” p. 17.
  • 39Hoover, Memoirs, vol. 2, p. 108.
  • 40One of these industrialists was the same Charles M. Schwab, head of Bethlehem Steel, who had bitterly fought Hoover in the 8-hour day dispute. Thus, in early 1929, Schwab opined that the way to keep prosperity permanent was to “pay labor the highest possible wages.” Commercial and Financial Chronicle 128 (January 5, 1929): 23.
  • 41National Industrial Conference Board, Salary and Wage Policy in the Depression (New York: Conference Board, 1932), p. 3; Leo Wolman, Wages in Relation to Economic Recovery (Chicago: University of Chicago Press, 1931), p. 1.
  • 42Committee on Recent Economic Changes, Recent Economic Changes in the United States (New York: McGraw-Hill, 1929), vol. 1, p. xi.
  • 43Committee on Recent Economic Changes, Recent Economic Changes in the United States, (New York: McGraw-Hill, 1929), vol. 2; Henry Dennison, “Management,” p. 523.
  • 44Another important foretaste of the later National Recovery Act (NRA) was Hoover’s use of the Department of Commerce during the 1920s to help trade associations form “codes,” endorsed by the Federal Trade Commission (FTC), to curtail competition in the name of eliminating “unfair” trade practices.
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