Herbert Hoover’s Hidden Economic Acumen
What an Awful President’s Secret Strength Could Teach Today’s Financial Leaders About Capitalism
From our nation’s inception, Americans have been a forward-looking people— youthful, optimistic, even revolutionary. Progress has been our byword, and the past has often been dismissed as stodgy, if not rudimentary. Few phrases are so thoroughly dismissive as to pronounce, of a person, a trend, or an idea, as, that, or they, are "history."
This inclination is rooted in a sense of optimism, and the confidence that we learn as we go. But it can also reflect a degree of hubris, and the mistaken notion that those who came before were not so clever as we today. When that happens it can blind us to the obvious truth that our forebears possessed wisdom as well as ignorance, and can lead us to repeating mistakes that might well be avoided.
Take the case of Herbert Hoover, America’s 31st president but also considered an exemplar of economic mismanagement for his futile response to the onset of the Great Depression, which arrived to the fanfare of the famous stock market collapse of 1929.
Prior to my undertaking a study of Hoover’s single term in office, I shared that view of Hoover. I still see Hoover as a failed president, unable or unwilling to cultivate the personal bond with the electorate that is the ultimate source of power and influence for any elected official. The more I learned of Hoover’s policies, however, the more impressed I became with his insight, vision, and courage—particularly when it came to managing an economy turned hostile. I found, too, that time has done little to discredit his trepidation over the consequences of mounting debt.
When the crash hit the stock market, it set off a collapse in values not only of financial instruments like stocks, but also a global slump in commodity prices, trade, and, soon after, employment. In the White House, Hoover responded in what was for him typical fashion: a brief, terse statement of confidence, asserting “the fundamental business of the country… is on a very sound basis.” At the same time, but quietly, Hoover pressed the members of his cabinet to ramp up federal spending to provide work for the wave of unemployment that he privately predicted. Finally, he convened a series of “conferences” with business leaders urging them to maintain wages and employment through the months to come.
These conferences were derided at the time, and more sharply later, as indicative of Hoover’s subservience to the capitalist class, but that is unfair. Hoover’s overriding commitment in all his years in government was to prize cooperation over coercion, and jawboning corporate leaders was part of that commitment. In any event, the wages of American workers were among the last casualties of the Depression, a reversal of practice from the economic downturns of the past.
More telling was the evolution of Hoover’s response as the Depression progressed, spreading from a market crash to the worldwide economic disaster that it became. Peoples and leaders across the globe took the failure of markets, currencies, and policies to mark the death rattle of capitalism per se, and turned to systemic, centralized solutions ranging from communism, exemplified by Soviet Russia, to fascism.
Hoover never accepted the notion that capitalism was dead, or that central planning was the answer. He insisted on private enterprise as the mainspring of development and social progress, and capitalism as the one “ism” that would preserve individual liberty and initiative. It appeared as establishmentarian cant to many of Hoover’s contemporaries, but Hoover’s instincts look like insight today.
More than that, Hoover recognized what appeared a failure of the capitalist system for what it was: a crisis of credit. With asset values in collapse and large parts of their loan portfolios in default, banks stopped lending to farmers, businesses, and builders, stalling recovery, stifling consumer spending and throwing more people out of work. It was a vicious cycle, soon exacerbated by the failure of thousands of rural banks that only added pressure on the financial system.
Hoover’s answer was to stage an unprecedented government foray into the nation’s credit markets. He conceived of a new Federal Home Loan Bank system that would offer affordable loans at a time when mortgages generally covered only half the cost of home building, and ran for terms of just three to five years. Such a novel proposal naturally bogged down in Congress, and it took most of Hoover’s term to get an agency up and running; in the meantime, Hoover fostered similar moves in agriculture, channeling more funds to the existing Federal Land Bank System. In 1932, for instance, Hoover's agriculture secretary supervised $40 million in small loans—$400 and under—that helped 200,000 farmers get their crops in the ground.
As the crisis deepened, Hoover turned his attention to the banking system itself. First he called to a secret conference a clutch of the nation’s most powerful bankers and browbeat them into creating a “voluntary” credit pool to backstop the balance sheets of the more fragile institutions; when that effort failed, the president launched a new federal agency to make direct loans to ailing banks, railroads, and other major corporations. Authorized to issue up to $2 billion in credit—more than half the federal budget at the time—the Reconstruction Finance Corp was the first time the federal government took direct, systemic action to shore up the country’s private finance markets. It anticipated TARP, the Troubled Asset Relief Program, by roughly 80 years.
Hoover broke ground on still another financial front, and that was monetary policy. Venturing onto the turf of the Federal Reserve, Hoover pressed to expand the money supply by increasing the kinds of financial paper that would qualify for Fed reserves, thus increasing the amount of funds available to lend, and by advocating Fed purchase of large quantities of debt. Such purchases are termed "open market operations" and are a means of expanding the money supply, thereby (theoretically) lowering interest rates and easing credit. Carried out on large scale they are what today we call "quantitative easing."
Here, however, Hoover ran up against one of his core beliefs—that the currency should be convertible to gold. He felt that maintaining easy convertibility for the dollar, based on the gold standard, was critical to trade and business confidence, and so opposed every measure that might be considered inflationary. At the same time, he understood that low interest rates and easy credit markets could foster investment and recovery.
Torn between his allegiance to sound money and his insights into the state of the economy, Hoover was unable to push his credit plans to the hilt. That is, he backed off from mass bond purchases before the credit markets had a chance to respond, and set too high the collateral requirements for the Reconstruction Finance Corp. loans for banks.
Hoover wanted high collateral requirements because he did not want to assist insolvent banks, just those with liquidity problems. Banks needed to show that, in the end, they could cover the loans. Hoover was also pressured on the same grounds by lawmakers on his left and his right to make sure he wasn't throwing good (public) money after bad (private) money. It’s worth noting that none of those in government at the time had seen lending to private parties—let alone banks—on such a scale before. So they adopted a very conservative approach, which they loosened after gaining some experience, and after a new president had entered the White House.
Indeed, it was left for Franklin Roosevelt to pick up where Hoover left off. That is not to say that FDR did not represent a change in course for the country; his New Deal was a distinct point of departure. But it’s also true, as FDR advisor Rex Tugwell put it later, that “practically the whole New Deal was extrapolated from programs Hoover started.”
That Hoover failed in the White House is a matter of accepted wisdom, and in certain fundamental ways true beyond doubt. Far less known are the nuances of what he did right—his insights into capitalism, what makes it work, and how to answer its setbacks. But in a larger sense Americans are living with Hoover's legacy. For better or worse we remain the global citadel of capitalism, the leader in economic growth and income disparity. To those wondering how we got to this point, some measure of credit for has to go to Hoover, an unpopular president who followed his core beliefs at a time when many abandoned theirs.
Charles Rappleye is the author of Herbert Hoover in the White House: The Ordeal of the Presidency (2016).