Herbert Hoover was sworn in as the President of the United States on March 4, 1928, after defeating Democrat nominee Al Smith in a landslide election. Hoover’s campaign was based on continuing the policies and prosperity of the previous Republican administrations of Warren Harding and Calvin Coolidge that would, according to a GOP campaign circular, put a “chicken in every pot and a car in every garage”.
Little did the Hoover administration or even the American public for that fact imagine that the country was about to go through the worst downturn in its history.
The Wall Street Crash of 1929
On 24 October 1928, the New York Stock Exchange fell 11 percent in an event known as Black Thursday. Immediately several leading banks including National City Bank and JP Morgan and Wall Street Bankers met to stop the chaos and prevent the market from falling further. It was then decided that the Banks would use their financial resources to purchase large amounts of shares of well known and established companies to keep prices artificially high.
President Hoover famously said in a radio address on Friday,
“The fundamental business of the country is on a sound and prosperous basis.”
Before the crash on Black Thursday, the value of the US stock market had nearly doubled over the course of 18 months. This was largely due to the Federal Reserve keeping interest rates low throughout the 1920s.
Banks offered easy credit to people through investment loans with no regard for the ability of the borrower to pay back the money. The stock market had kept rising as more and more people piled the acquired money into stocks, buying into the rampant belief that the market would only go up. Unfortunately, the speculative bubble did not last long.
The move by leading banks on Black Thursday, only worsened the condition, panic ensued on Monday morning, as investors tried to get out of the market and book profits.
Panic selling reached its breaking point on Tuesday, October 29, with millions of shares put up for sale with no buyers available at any price.
More than 16 million shares were traded and $ 14 billion dollars of investor wealth was wiped out in a single day, The event infamously went down in history as Black Tuesday and signaled the start of the Great Depression.
The Great Depression
The market crash did not directly cause the depression but acted as a catalyst. Even though only 10% of American households had investments in the market, more than 90 percent of all banks were exposed to the stock market.
Banks faced huge losses with little in cash reserves, due to the lowering of the amount required by banks to be kept safe in vaults by the Federal Reserve. The situation was exacerbated by the inability of borrowers to pay back the investment loans. Over the course of the next four years, more than 5,000 banks shut their doors.
The optimism of the 1920s crashed spectacularly, the Roaring Twenties, as the decade was fondly remembered, gave way to the Great Depression of the 1930s.
Since no safety provisions existed at that time that guaranteed the safety of deposits, millions saw their life savings disappear. Moreover, the depression was prolonged by the passing of the Smoot - Hawley Tariff Act (1930) by Congress. American farmers facing increasing competition from Europe and Latin America lobbied Congress to pass for increasing tariffs on agricultural imports.
However, the Tariff Act drawn by Congress included tariffs on industrial goods as well as agricultural imports, provoking other countries to impose retaliatory tariffs. Despite staunch opposition from Progressive Republicans, Hoover went ahead to sign the Smoot-Hawley Tariff Act and the value of world trade fell in half in the next 4 years as countries imposed tariffs in tit for tat moves. Firms were already hit domestically and saw their sales drop in international markets.
Consumer investment and spending dropped forcing industries to halt production and fire workers. Automobile factories that employed most of the workers in urban areas laid off thousands and were forced to close. The United States Steel Corporation (U.S.Steel) went from 211,000 employees to zero in the spring of 1932.
Between 1929 and 1933, industrial production fell 47%, GDP declined by 30% and unemployment skyrocketed to 20 percent. Soon, shanty towns and encampments came up for the homeless, mockingly called the Hoovervilles over the President's inaction to respond to the crisis.
Above: A Hooverville in Seattle.
The Hoover Administration's Response to the Crisis.
In the 1920s, classical economics was undisputed, and it was generally accepted that output and prices would return to a state of equilibrium in due time but as the depression carried on, it was evident that the classical school of thought did not work.
The Great Depression countered the classical economic theory and propelled the acceptance of Keynesian economics, developed by British economist John Mayard Keynes in 1936. Keynes's theory argues markets are unstable and the government can stabilize it through intervention in the form of creating demand for goods and services.
Hoover was a conservative Republican who believed in limited Government intervention and letting the natural process of supply and demand ensure in the market. He was convinced that Government handouts would weaken individual character and turn people away from work and refused to intervene.
Hoover was a firm believer in rugged individualism, that people are responsible for their own success or failure and it is not the responsibility of the government. Instead, the administration decided to leave the relief work to volunteer organizations and charities, the issue was that these charities also saw their donations dwindle.
In 1931, Hoover formed the President’s Organisation of Unemployment Relief (POUR) which assisted state and private charities such as the Red Cross and Salvation Army in coordinating relief programs and forming employment councils which tied the unemployed to job opportunities.
The organization did not see much success as Hoover refused to spend government money and by the end of 1932, the organization was dissolved, creating barely 100,000 jobs at a time when 15 million were unemployed.
Congress also proposed the Federal Emergency Relief Bill which would have provided states $375 million to provide food, clothing, and shelter to the homeless but Hoover opposed the bill stating that it would harm the balance of power between states and the Federal government.
By the end of the year, however, Hoover realized that drastic action was necessary if he had to save his presidency and the nation. On December 8, he addressed Congress and proposed multiple programs to aid the economy which Historian David Kennedy has referred to as Hoover’s second program or as others called it Hoover’s New Deal.
The Reconstruction Finance Corporation (RFC) was established in early January of 1932 and provided loans to banks, firms, and other institutions in need. An executive order was signed that temporarily halted immigration and created a Public Works Administration to coordinate and expand infrastructure projects.
The Revenue Act of 1932, raised income taxes and corporate income taxes dramatically with the bracket ranging from 36% to 63%. The most important and consequential of these policies was the Glass-Steagall Act of 1932, that approved lending of credit by the regional Federal Reserve Bank to private banks.
These policies reformed the way in which the Federal Government responds to an economic crisis, but besides the Public Works Administration, none of the policies improved the condition of American workers.
His signing of the Smoot-Hawley Tariffs Act and opposition of the Emergency Bill had created an image that cast Hoover as uncaring about the anguish of his people and his new programs were viewed as too little or too late and his popularity had already nosedived.
The 1932 Presidential Elections.
As the 1932 election rolled in it was evident that Hoover was going to lose the election, running against Democrat Nominee Franklin D. Roosevelt, who spurred optimism in crowds through his uplifting oratory. Roosevelt compared Hoover’s Presidency to the Four Horsemen of Apocalypse: Destruction, Delay, Despair, and Doubt and charged that the Federal Government was directly responsible for ensuring the welfare of the American people.
During Hoover’s campaign trails, his train was pelted by eggs and rotten fruits, in one incident, the Secret Service had to remove spikes placed by a disgruntled citizen on the tracks of the President’s train. Unsurprisingly, Hoover lost the election in a landslide, losing in 42 out of the then 48 states.
To his credit, however, Hoover had to face a crisis no American President had faced before. His initiation of large Public Works Programs and expansion of the role of Federal reserve, though deeply structurally flawed, was the most radical step that a President had ever undertaken in response to a recession.
However, the main problem was that the Government did little to help the unemployed and homeless directly. Hoover, despite being cast as uncaring was the only President besides John F. Kennedy refused his salary as President, and annually contributed $25,000 to private charities. President Hoover was an ideologue rather than a pragmatist but his approach failed to work during the economic downturn.
According to Prof. Robert McElvaine,
"It is impossible to understand Herbert Hoover and his reaction to the Depression without seeing that he was that rarest of politicians, a man of principle”.
Historian David Kennedy wrote that Hoover’s 1932 Second Program,
“helped lay the groundwork for a broader restructuring of the government’s role in many sectors of American life, a restructuring known as the New Deal.”
Even Roosevelt’s advisors grudgingly acknowledge that most of the features of Roosevelt’s rescue package for the economy, popularly called the New Deal, owed its origins to Hoover’s policies. Yet Hoover is still regarded as one of the worst Presidents of the United States. History judged him harshly and his poor reputation is not what he deserved.
Lee Ohanian, Professor of Economics at UCLA said it best,
“Hoover was the wrong man for the job, at the exact wrong time.”
Written by Arnav Singh