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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

August 25, 2010 at 9:29 AM

Channeling the ghost of Herbert Hoover and other Depression frights

Let’s play counterfactual history. What if the Harding, Coolidge and Hoover administrations in the 1920s had presided over and expanded a large federal government, prosecuted two wars, while still encouraging a huge bubble based on speculation, fraud, deregulation and feral greed. In 1929, it all crashed down, sending the world financial system to the brink of collapse.

Treasury Secretary Andrew Mellon led an aggressive plan to rescue the banks and speculators, and a panicked Congress went along. Even so, Hoover lost the 1932 election to “pro-business” Democrat Al Smith, Franklin Roosevelt losing out at the convention for being a “closet socialist.” As president, Smith continued Mellon’s policies, even though conservatives denounced him for his Catholic faith and wondered whether he was even an American citizen. He put through a stimulus, but it was too small to make up the loss of output caused by the crash. Meanwhile, the Fed, confronted with high unemployment and deflation, sat on its hands, tapped out from bailing out Wall Street — which was quickly back to its old speculative ways.

Would we be in a much different place than today?

To be sure, America in the 1920s and 1930s was much poorer and lacking a social safety net compared with today. So the pain would have been severe. Also, alternative forms of government and social organization, such as socialism, communism, fascism (Mussolini was a former newspaperman) and Huey Long’s populism, were popular. Also, America in the Depression was still the world’s largest creditor, manufacturer and exporter. Counterfactual history only goes so far. A President Smith might have been followed by something quite sinister.

But one point is clear. In the Great Depression, the “old order” was completely discredited. Its practices would not return until the 1980s, and especially after Glass-Steagall was repealed by the Republican Congress and Democratic President Bill Clinton in 1999. With the banksters in ruins, the nation was open to the experimentation and wily political moves of FDR. This included winding down bad banks, putting in place regulation that served the nation well for decades, passing Social Security, undertaking massive infrastructure investments to create jobs and a host of other reforms. Also, the Depression years before FDR took office saw a purging of most of the bad bets made during the 1920s, rather than them being concealed on the books of the Fed.

Hoover, as I’ve written before, got a bad rap from history. He was a self-made man, started as a progressive and differed markedly from the laissez-faire policies of Coolidge. He was brilliant in many ways, a great humanitarian, schooled in the world and promised change. Faced with the downturn, he even proposed ideas that FDR would successfully implement. But Hoover was overwhelmed by events, and his mind was too fixed in the thinking of the status quo to adapt to the total discontinuity of the Great Depression.

In many ways, he was like President Obama.

Today’s Econ Haiku:

The Dow’s down again

Is it because of housing?

Or does it see worse?

Comments | More in Bailout, Federal Reserve, Great Recession


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