Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.
It would not be unusual, even for a libertarian politician. FDR is immensely popular with the inflationists who overwhelmingly wrote the economic history of the depression era. In fact, FDR was not the first “something must be done” American president, a policy which started with his predecessor, Herbert Hoover. But the story told is that FDR took over from heartless Hoover who had failed to step in and rescue the economy from a free-market catastrophe, by standing back and letting events take their course instead. Nothing is further from the truth: Hoover was an interventionist to his fingertips. The last of the laissez-faire presidents was Calvin Coolidge, Hoover’s predecessor.
A few years ago, the BBC broadcast a programme extolling the virtues of FDR and his new deal. Stephanie Flanders, at that time the BBC’s economics correspondent, reiterated the myth about Hoover being a non-interventionist and FDR having all the correct reflationary policies. In a piece to camera at the Hoover Dam, no less, she recounted how it was an example of FDR’s new deal stimulus. While it wasn’t completed until 1936, building started in 1931 as a project by the eponymous Hoover, pursuing the same interventionist policies as FDR before FDR’s landslide election. It was never FDR’s project, the clue being in the dam’s name. Research by Flanders and the BBC was either biased, deficient, blind or all three.
The myth that has even drawn in Boris is so powerful it has intelligent people swearing the earth is flat. The FDR fairy-story is fundamental to the modern state’s interventionist stance; the very reason for its existence and its welfare commitments to the electorate. Wishful thinking about FDR’s pioneering role is now the pervasive theology. But the way the world is viewed cannot change the facts, and to quote FDR and his new deal as the template for economic policy is to repeat the errors that led to the longest and deepest depression in American history.
If in a few words one was to sum up why the state fails in its interventionist quest, it would be its inability to understand change. Free markets change all the time. Businesses and whole industries evolve and disappear in a natural process of selection driven by the consumer. The state’s response to a crisis is always aimed at a return to normality; normality being an unchanged state from before the crisis. The state protects yesterday’s jobs and yesterday’s businesses. Worse, by preventing evolutionary change at the heart of a dynamic economy it deprives it of the resources required to evolve. And that’s why the depression lasted into the Second World War.
The back-story to the depression
Before Hoover, US presidents understood a hands-off policy would let the economy rapidly fix itself. The post-war 1920—1921 depression in America was allowed to run its course. It lasted just eighteen months and was the prelude to a period of technological revolution that gave enormous benefits in the quality of life for all Americans. Following President Harding’s death in 1923, Coolidge was elected the new president. While Coolidge enforced a strict laissez-faire policy, he was either unaware of or ignored the monetary policies of Benjamin Strong at the Fed, which, to be fair to Coolidge, was only a decade old. The Fed’s monetary policy was the cause of an inflationary boom which ended in a stockmarket bubble in 1929.
In 1927, Coolidge announced he would not be standing for a second term, and Herbert Hoover was elected President in 1928 nearly a year before the stock market crisis occurred.
Fuelled by a free market approach and the stimulus of unbacked credit, when Hoover took office in March 1929 the economy was, in the epithet of historians, roaring. We can now begin our comparison with the present day. Boris Johnson became Prime Minister after a similar inflation-fuelled period; but the more important correlation is with Republican Donald Trump, whose interventionist policies imitate Hoover’s from his time as Secretary of Commerce in Harding’s administration onwards. Hoover deported immigrants and Trump builds a wall, both reasoning they take American jobs. And like Hoover, Trump uses tariffs to protect farmers and businesses from foreign competition deemed unfair.
The combination of a massive credit expansion in the 1920s and the Smoot-Hawley Tariff Act passed by congress in October 1929 — the month of the Wall Street Crash — serves as a template for the condition of America’s economy today. Apart from some differences in timing, the most significant difference is in the money. Before April 1933 the dollar was freely exchangeable by the public for gold at $20.67 to the ounce; today the dollar is unbacked. Prices were stable, today they rise.
By passing the Smoot-Hawley Act at the top of the credit cycle, Congress ensured a sharp downturn in the economic outlook, persuading bankers to call in their loans. The economy began to contract, and interventionist Hoover went to work. To quote from his memoires;
“…the primary question at once arose as to whether the President and the Federal government should undertake to investigate and remedy the evils… No President before had ever believed that there was a governmental responsibility in such cases. No matter what the urging on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions . . . therefore, we had to pioneer a new field.”[i]
Hoover called a series of White House conferences with industry leaders and bankers to persuade them to invest and maintain wages in order to keep consumer spending going. Like the neo-Keynesians of today, Hoover believed consumer spending was vital for the economy, but failed to make the connection with production, which is always first in temporal order, and provides the product for consumption without which it cannot happen. Hoover’s view on maintaining wages is reflected today in minimum wage rates, which innocuous though they may seem render certain activities uneconomic.
As is the case today, the Fed was ready to inflate. According to Murray Rothbard, the Fed
“…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.” [ii]
Monetary policy was a doppelganger for the Fed’s policies today. In today’s money, $300 million is about $26bn, using gold as the conversion factor. Today’s stimulus is a thousand times greater in real terms — so far.
In 1932 Roosevelt won a landslide against Hoover, and as was the custom at the time he took office the following March. Only a week before, an assassination attempt on Roosevelt struck the wrong man who died shortly afterwards. Banks were failing. Farmers were in revolt. The numbers of unemployed were increasing alarmingly. Hoover’s reflationary policies had failed, and he was said to be the least popular man in America on inauguration day. Fast-forward eighty-eight years and we see President Trump following in Hoover’s footsteps in this election year; and we can be pretty sure Joe Biden — if he is not asleep at the wheel — will cast himself as the new FDR with his version of the new deal.
Roosevelt then delivered his inaugural address, which included the famous line, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” His speech was followed by the Hundred Days, the first time a president had set such a schedule.
In Britain, Rishi Sunak, the new Chancellor, is now pursuing his version of a Hundred Days announcing subsidies and new support as the occasion demands, financed by monetary inflation. Admittedly Sunak remains a free marketeer but has yet to prove his measures are temporary. Meanwhile, President Trump is destroying his administration’s finances in an attempt to contain the economic fallout from the coronavirus in his election year.
They say that repeating a failed action in search of a different outcome is a sign of madness. Hoover and Roosevelt were pioneers of today’s failed economic policies and it is their post-war successors who are arguably certifiable. But the problem is deeper than that, with the public voting for the same failed policies, so even an economically literate politician has to deliver solutions in that context. It is what makes history repetitious. Instead of economics, psychological factors drive politics, including the public desire for the state to provide easy solutions to economic and personal difficulties. But the lesson from the Hoover era is that we stand on the precipice of an economic collapse as a result of a combination of excessive credit creation in the years before and the introduction of trade tariffs. And that was before the coronavirus was added to this lethal mix.
The psychology suggests that this time the politicians and the monetary authorities will pursue much the same course as before, even more aggressively. So far, the evidence supports this thesis, and it allows us to anticipate mistakes yet to be made.
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