Hoover reversed the Depression, until hit by bad luck from Europe

Herbert Hoover succeeded in reversing the Depression during early 1931.  During the first 4 months of 1931, industrial production in the US rose slightly, after plunging sharply throughout 1930.  Then bad luck hit.  The German-Austrian agreement of late March poisoned relations with France.  Then the Austrian bank Kreditanstalt failed in May.  Then German banks came under pressure, then the German currency.  Then the British currency.  The crisis kept moving from one country to another.  People sought gold as a safe haven, and the value (or purchasing power) of gold increased.  More deflation set in.  The severe recession of 1930 turned into the Great Contraction.

Here’s Obama yesterday:

At a town hall meeting on his campaign-style tour of the Midwest, President Obama claimed that his economic program “reversed the recession” until recovery was frustrated by events overseas.

Hoover wasn’t able to print gold, but can be blamed for supporting the Fed’s tight money policies.  Obama can’t print dollars, but can be blamed for not moving aggressively to put people at the Fed who understand the need for more dollars.


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23 Responses to “Hoover reversed the Depression, until hit by bad luck from Europe”

  1. Gravatar of JimP JimP
    16. August 2011 at 10:02

    And here is a lady to put onto the Fed.

    http://www.nytimes.com/2011/08/14/business/economy/from-world-war-ii-economic-lessons-for-today.html?_r=1&src=tp&pagewanted=print

  2. Gravatar of JimP JimP
    16. August 2011 at 10:08

    If only Obama read this blog – or someone with real power in the administration. The horrors of Rick Perry would then blow away like fog in the morning.

    I think if Krugman would promote this blog with his foghorn that would be real wonderful.

  3. Gravatar of D. F. Linton D. F. Linton
    16. August 2011 at 10:10

    Your headline made me laugh out loud. True and deliciously cruel.

  4. Gravatar of J Mann J Mann
    16. August 2011 at 10:28

    I apologize for being lazy on this question — who are Obama’s appointees to the fed, and where do they stand on QE3? (Also, are there any open seats remaining?)

  5. Gravatar of beowulf beowulf
    16. August 2011 at 11:02

    If you haven’t already, do read Kevin Baker’s prescient Harper’s piece from 2009, Barack Hoover Obama: The best and the brightest blow it again.
    http://www.harpers.org/archive/2009/07/0082562

    The section on Hoover’s life before politics is outstanding, beginning with: “Orphaned and penniless by the age of nine, Hoover was raised by an exploitative uncle who considered him more chattel than son…” and ending with: “By the time he was forty, Hoover was worth $85 million in today’s dollars, and he retired from business to take up public life.”
    So far as I can tell, no community organizing along the way. :o)

  6. Gravatar of John John
    16. August 2011 at 12:29

    If Hoover had really succeeded in putting the economy on the path to recovery, the US should have been able to absorb that shock. Also, I’m surprised how big government friendly this blog is becoming. It is really becoming just like Krugman’s: citing and agreeing with the same socialists. Hoover stepped up government spending, ran larger deficits, and implemented more programs to a fight a recession than any president before him and most presidents since. Somehow this didn’t help.

  7. Gravatar of More “ghosts from the past” | Historinhas More “ghosts from the past” | Historinhas
    16. August 2011 at 14:31

    […] a short post by Scott Sumner: Herbert Hoover succeeded in reversing the Depression during early 1931.  During the first 4 […]

  8. Gravatar of Ron T Ron T
    16. August 2011 at 15:26

    Hey, it was explained to you many times already by MMT people that the Fed by itself cannot print dollars, the Treasury can, when instructed by Congress.

  9. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 16:20

    Thanks JimP and DF.

    J. Mann, Ben Bernanke and two others. There are two empty seats. He left 2 or 3 seats empy for almost a year and a hald without even nominating anyone.

    I assume the two other appointees tend to be more dovish, but am not sure.

    beowolf. Actually that article isn’t quite right on the Depression. Hoover was fairly active, he just did the wrong things.

    John, I agree that Hoover was an activist, and an awful President, so I think we agree.

    Ron, That’s right, I forgot. :)

  10. Gravatar of Morgan D Morgan D
    16. August 2011 at 17:33

    Some historians argue that one of Hoover’s main problems was that he spent too much time focusing on Europe’s economy and trying to help fix European problems, believing that the main problem in the US economy was a contagion effect. He believed that by fixing Europe, the U.S. economy would immediately recover, so he largely ignored the domestic economic issues.

    I don’t know if President Obama can again blame Europe (see quote about restoring the recession until events overseas) in the same way for ruining his recovery, as I do not consider Europe to be a big cause of high unemployment in the US or lack of AD. Some argue that the equity markets have dropped in response to Europe, but they act so irrational of late, that is not saying much. Unlike Hoover however, Obama has neither worked to solve Europe’s problems nor worked very hard to solve domestic issues. (As Peggy Noonan said, his Presidential tagline may very well end up being “He made it worse”)

    P.S. From a loyal reader but first time commenter, I always enjoy reading your blog, it is easily one of the best out there.

  11. Gravatar of Alexander Hudson Alexander Hudson
    16. August 2011 at 18:13

    Obama appointees now on the Fed: Bernanke, Daniel Tarullo, Sarah Bloom Raskin, Janet Yellen.

    Non-Obama appointees now on the Fed: Elizabeth Duke.

    So 4/5 on the Board of Governors are Obama appointees. On Friday it was reported that Obama plans to nominate Jeremy Stein of Harvard and Richard Clarida of Columbia to fill the remaining vacancies (finally). In fact, I’ve been checking this blog recently to see what Scott thinks about them. Scott, your thoughts?

  12. Gravatar of Charlie Charlie
    16. August 2011 at 18:34

    Scott,

    Have you blogged on this before? I’d heard FDR get a lot of credit for taking the U.S. off the gold standard and thus creating aggressive monetary expansion, but this is the first I’ve heard this other monetary expansion mechanism.

    From Christy Romer:

    http://www.nytimes.com/2011/08/14/business/economy/from-world-war-ii-economic-lessons-for-today.html?_r=3&pagewanted=print&pagewanted=all>

    “As I showed in an academic paper years ago, the war first affected the economy through monetary developments. Starting in the mid-1930s, Hitler’s aggression caused capital flight from Europe. People wanted to invest somewhere safer “” particularly in the United States. Under the gold standard of that time, the flight to safety caused large gold flows to America. The Treasury Department under President Franklin D. Roosevelt used that inflow to increase the money supply.

    The result was an aggressive monetary expansion that effectively ended deflation. Real borrowing costs decreased and interest-sensitive spending rose rapidly. The economy responded strongly. From 1933 to 1937, real gross domestic product grew at an annual rate of almost 10 percent, and unemployment fell from 25 percent to 14. To put that in perspective, G.D.P. growth has averaged just 2.5 percent in the current recovery, and unemployment has barely budged.

    There is clearly a lesson for modern policy makers. Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today. The Federal Reserve’s policy statement last week provided tantalizing hints that it may be taking this lesson to heart and using its available tools more aggressively in coming months.”

    How does this relate to leaving the gold standard? If FDR left the gold standard in 1933, why did we need gold inflows for monetary expansion?

  13. Gravatar of jami bair jami bair
    16. August 2011 at 22:42

    Just want to say thanks for coming back and posting again. I know you have been back for some time…but I have never posted before. I am not smart enough really for the conversation, but I’m a lot smarter after reading your posts…thank you:)
    I’m also refreshed by people like you and Tyler, who speak the truth regardless of politics. I’ve always wanted to believe (I know stupid)…that economists were more like scientists and studied the data. I know now that economists are just backing the horse that will make the most money for them like everyone else in America. Oh well.

  14. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    16. August 2011 at 23:09

    […] The Hoover manoeuvre on recessionary […]

  15. Gravatar of John Thacker John Thacker
    17. August 2011 at 00:37

    Scott, your National Review convert Ramesh Ponnuru has written another column, this one on Bloomberg, promoting your views.

  16. Gravatar of Dr. D Dr. D
    17. August 2011 at 03:53

    Time to start minting those 1 trillion platinum coins…

  17. Gravatar of David Pearson David Pearson
    17. August 2011 at 05:43

    The European bad news hit Hoover when prices were deflating. Today, core intermediate PPI is up 7.8% over the past twelve months. The durable goods (finished) PPI is up 1.1% in just the past three months–despite flat consumer spending.

    The oil price measured by Brent Crude (the benchmark used for pricing gasoline) is up more than 20% from a year ago. This, despite the release of the SPR that made up for the Lybia shortfall; despite the unexpected quiet in the Mideast; and despite the unexpected slowing in China.

    What we have in common with the Great Depression is sustained high unemployment; a host of other metrics (NGDP growth, inflation, profit margins, wages, manufacturing strength, durables spending, business investment, real interest rates, money growth) is materially different.

    Lastly, what, exactly, is an actor attempting to accomplish by holding gold as a “safe haven” rather than currency? Other than protecting against a drop in the value of currency, can you come up with a reason or motivation backed by theory? I unfortunately cannot.

  18. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 06:18

    Morgan D, Those are good points. I’d add that Hoover was right to try to help out Europe. The problem wasn’t that he was passive in the US, but rather that he favored the policies that caused the Depression:

    1. Tight money
    2. High taxes
    3. High tariffs
    4. High wages during deflation

    Alexander, I forget about Yellen, as she moved over from a regional bank. Good point about Obama, he controls the B of G, and they could cut the IOR without FOMC permission.

    I don’t have strong views on the new picks. I’ve argued that all FOMC members should be elite monetary economists. Clarida seems to fit that description.

    Charlies, I think Romer overrates the importance of gold flows. It helped, but currency devaluation was the big factor.

    Thanks Jami.

    John, Thanks for the link.

    D, Just don’t make too many.

    David, You said:

    “Lastly, what, exactly, is an actor attempting to accomplish by holding gold as a “safe haven” rather than currency? Other than protecting against a drop in the value of currency, can you come up with a reason or motivation backed by theory? I unfortunately cannot.”

    I think fear of currency depreciation is a big reason people hold gold.

    I agree the Great Depression was much worse, but the basic similarity is that both were caused by NGDP shortfalls, and both were aggravated by bad supply-side policies.

  19. Gravatar of David Pearson David Pearson
    17. August 2011 at 06:23

    Related to the above: couldn’t one make the case that 2011 has more in common with 1936-1937 than with 1932-1933? The metrics I listed above (I forgot to add higher commodity prices) certainly match up with that later time period, as does sustained high unemployment. The comparison extends to political economy: there is pressure from politicians and political groups to restrain fiscal spending and tighten monetary policy.

  20. Gravatar of David Pearson David Pearson
    17. August 2011 at 06:51

    “…the basic similarity is that both were caused by NGDP shortfalls.”

    Friedman and Bernanke both argued the GD was caused by severe deflation brought about by a policy error. Instead, we have moderate inflation. I would argue saying both are “NGDP shortfalls” is like saying, “jumping off a step ladder and a precipice are similar.”

    Measured with 1930’s methodology, unemployment today is in the mid-to-low teens. Per unit of NGDP shortfall, our unemployment rate is radically higher. This implies factors other than various price rigidities (sticky wages, prices, etc) are at work in producing unemployment.

  21. Gravatar of W. Peden W. Peden
    17. August 2011 at 07:18

    David Pearson,

    “Friedman and Bernanke both argued the GD was caused by severe deflation brought about by a policy error. Instead, we have moderate inflation.”

    Sure- and the US doesn’t have a GD-style crisis either.

    “I would argue saying both are “NGDP shortfalls” is like saying, “jumping off a step ladder and a precipice are similar.””

    True, but the care for the patient is going to be very similar in both cases.

    “Measured with 1930’s methodology, unemployment today is in the mid-to-low teens. Per unit of NGDP shortfall, our unemployment rate is radically higher. This implies factors other than various price rigidities (sticky wages, prices, etc) are at work in producing unemployment.”

    Agreed. It’s not JUST a demand-side problem.

  22. Gravatar of David Pearson David Pearson
    17. August 2011 at 07:39

    W. Peden,

    “Sure- and the US doesn’t have a GD-style crisis either.”

    Take a look at the Michael Darby estimates of GD unemployment with federal employees counted as “employed”. By 1937 the number had fallen to 9.1% — about today’s level. I would argue that, adjusting for the fall in the labor participation rate, we are higher than 9% on an apples-to-apples basis. So, yes, unemployment spiked much more in 1933: one would expect an economy dominated by manufacturing to have much more volatile unemployment. During 1936-1937, the period most similar to today, unemployment in the GD was lower than today and just as persistent.

    Spikes in unemployment were quite common in the pre-1940’s economy. What differentiated the GD was the persistence of unemployment, a characteristic we share.

  23. Gravatar of ssumner ssumner
    17. August 2011 at 16:05

    David, I agree that in some ways 1937 is a better fit.

    Friedman also argued the problem in Japan was a NGDP shortfall. And they did not have sharp deflation.

    I’ve consistently said that there are many factors other than sticky wages behind the high unemployment. But the fall in NGDP is the cause of some of those other factors, like extended UI.

    I’m not sure what to make of your jobs vs. NGDP argument. That seems to imply higher productivity, and the new GDP data casts doubt on that hypothesis.

    There are different schools of thought on the Darby estimates. These numbers were lower because they counted the WPA, CCC, etc, people as “employed.” The government counted them as unemployed. I’d guess the truth lies somewhere in between the two estimates. They were sort of half employed. But I concede that right now may be as bad as early 1937, which was the best year between 1930 and 1940.

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