Hoover's Attack on Laissez-Faire

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This article
is excerpted from chapter 7 of America’s
Great Depression
.

 

 
“To
scoff at Hoover’s tragic failure to cure the depression as a
typical example of laissez-faire is drastically to misread the
historical record.”

 
 

If government
wishes to alleviate, rather than aggravate, a depression, its only
valid course is laissez-faire – to leave the economy alone.
Only if there is no interference, direct or threatened, with prices,
wage rates, and business liquidation will the necessary adjustment
proceed with smooth dispatch.

Any propping
up of shaky positions postpones liquidation and aggravates unsound
conditions. Propping up wage rates creates mass unemployment, and
bolstering prices perpetuates and creates unsold surpluses.

Moreover, a
drastic cut in the government budget – both in taxes and expenditures
– will of itself speed adjustment by changing social choice
toward more saving and investment relative to consumption. For government
spending, whatever the label attached to it, is solely consumption;
any cut in the budget therefore raises the investment-consumption
ratio in the economy and allows more rapid validation of originally
wasteful and loss-yielding projects.

Hence, the
proper injunction to government in a depression is cut the budget
and leave the economy strictly alone. Currently fashionable economic
thought considers such a dictum hopelessly outdated; instead,
it has more substantial backing now in economic law than it did
during the 19th century.

Laissez-faire
was, roughly, the traditional policy in American depressions before
1929. The laissez-faire precedent was set in America’s first great
depression, 1819, when the federal government’s only act was to
ease terms of payment for its own land debtors. President Van Buren
also set a staunch laissez-faire course, in the Panic of 1837. Subsequent
federal governments followed a similar path, the chief sinners being
state governments, which periodically permitted insolvent banks
to continue in operation without paying their obligations.[1]
In the 1920–1921 depression, government intervened to a greater
extent, but wage rates were permitted to fall, and government expenditures
and taxes were reduced. And this depression was over in one year
– in what Dr. Benjamin M. Anderson has called “our last natural
recovery to full employment.”

Laissez-faire,
then, was the policy dictated both by sound theory and by historical
precedent. But in 1929, the sound course was rudely brushed aside.
Led by President Hoover, the government embarked on what Anderson
has accurately called the “Hoover New Deal.” For if we define “New
Deal” as an antidepression program marked by extensive governmental
economic planning and intervention – including bolstering of
wage rates and prices, expansion of credit, propping up of weak
firms, and increased government spending (e.g., subsidies to unemployment
and public works) – Herbert Clark Hoover must be considered
the founder of the New Deal in America. Hoover, from the very start
of the depression, set his course unerringly toward the violation
of all the laissez-faire canons. As a consequence, he left office
with the economy at the depths of an unprecedented depression, with
no recovery in sight after three and a half years, and with unemployment
at the terrible and unprecedented rate of 25 percent of the labor
force.

 

 

$35
 $29

 
 

Hoover’s role
as founder of a revolutionary program of government planning to
combat depression has been unjustly neglected by historians. Franklin
D. Roosevelt, in large part, merely elaborated the policies laid
down by his predecessor. To scoff at Hoover’s tragic failure to
cure the depression as a typical example of laissez-faire is drastically
to misread the historical record. The Hoover rout must be set down
as a failure of government planning and not of the free market.
To portray the interventionist efforts of the Hoover administration
to cure the depression, we may quote Hoover’s own summary of his
program, during his presidential campaign in the fall of 1932:

We might
have done nothing. That would have been utter ruin. Instead
we met the situation with proposals to private business and
to Congress of the most gigantic program of economic defense
and counterattack ever evolved in the history of the Republic.
We put it into action…. No government in Washington has
hitherto considered that it held so broad a responsibility for
leadership in such times…. For the first time in the history
of depression, dividends, profits, and the cost of living, have
been reduced before wages have suffered…. They were maintained
until the cost of living had decreased and the profits had practically
vanished. They are now the highest real wages in the world.

Creating
new jobs and giving to the whole system a new breath of life;
nothing has ever been devised in our history which has done
more for … “the common run of men and women.” Some of
the reactionary economists urged that we should allow the liquidation
to take its course until we had found bottom…. We determined
that we would not follow the advice of the bitter-end liquidationists
and see the whole body of debtors of the United States brought
to bankruptcy and the savings of our people brought to destruction.[2]

The
Development of Hoover’s Interventionism: Unemployment

Hoover, of
course, did not come upon his interventionist ideas suddenly. It
is instructive to trace their development and the similar development
in the country as a whole, if we are to understand clearly how Hoover
could so easily, and with such nationwide support, reverse the policies
that had ruled in all previous depressions.

Herbert Clark
Hoover was very much the “forward-looking” politician. We have seen
that Hoover pioneered in attempts to intimidate investment bankers
in placing foreign loans. Characteristic of all Hoover’s interventions
was the velvet glove on the mailed fist: i.e., the businessmen would
be exhorted to adopt “voluntary” measures that the government desired,
but implicit was the threat that if business did not “volunteer”
properly, compulsory controls would soon follow.

When Hoover
returned to the United States after the war and a long stay abroad,
he came armed with a suggested “Reconstruction Program.” Such programs
are familiar to the present generation, but they were new to the
United States in that more innocent age. Like all such programs,
it was heavy on government planning, which was envisaged as “voluntary”
cooperative action under “central direction.”[3]
The government was supposed to correct “our marginal faults” –
including undeveloped health and education, industrial “waste,”
the failure to conserve resources, the nasty habit of resisting
unionization, and seasonal unemployment.

Featured in
Hoover’s plan were increased inheritance taxes, public dams, and,
significantly, government regulation of the stock market to eliminate
“vicious speculation.” Here was an early display of Hoover’s hostility
toward the stock market, a hostility that was to form one of the
leitmotifs of his administration.[4]
Hoover, who to his credit has never pretended to be the stalwart
of laissez-faire that most people now consider him, notes that some
denounced his program as “radical” – as well they might have.

So “forward-looking”
was Hoover and his program that Louis Brandeis, Herbert Croly of
the New Republic, Colonel Edward M. House, Franklin D.
Roosevelt, and other prominent Democrats for a while boomed Hoover
for the presidency.[5]

Hoover continued
to expound interventionism in many areas during 1920. Most relevant
to our concerns was the conference on labor-management relations
that Hoover directed from 1919 to 1920, on appointment by President
Wilson and in association with Secretary of Labor William B. Wilson,
a former official of the United Mine Workers of America. The conference
– which included “forward-looking” industrialists like Julius
Rosenwald, Oscar Straus, and Owen D. Young, labor leaders, and economists
like Frank W. Taussig – recommended wider collective bargaining,
criticized “company unions,” urged the abolition of child labor,
and called for national old-age insurance, fewer working hours,
“better housing,” health insurance, and government arbitration boards
for labor disputes. These recommendations reflected Hoover’s views.[6]

Hoover was
appointed Secretary of Commerce by President Harding in March 1921,
under pressure from the left wing of the Republican Party, led by
William Allen White and Judge Nathan Miller of New York. (Hoover
was one of the first of the modern breed of politician, who can
find a home in either party.) We have seen that the government pursued
a largely laissez-faire policy in the depression of 1920–1921, but
this was not the doing of Herbert Hoover. On the contrary, he “set
out to reconstruct America.”[7]
He only accepted the appointment on the condition that he would
be consulted on all economic policies of the federal government.
He was determined to transform the Department of Commerce into “the
economic interpreter to the American people (and they badly need
one).”[8]

Hardly had
Hoover assumed office when he began to organize an economic conference
and a committee on unemployment. The committee established a branch
in every state having substantial unemployment, along with subbranches
in local communities and mayors’ emergency committees in 31 cities.[9]
The committee contributed relief to the unemployed, and also organized
collaboration between the local and federal governments.

As Hoover recalls:

We developed
cooperation between the federal, state, and municipal governments
to increase public works. We persuaded employers to “divide”
time among their employees so that as many as possible would
have some incomes. We organized the industries to undertake
renovation, repair, and, where possible, expand construction.[10]

Standard Oil
of New Jersey announced a policy of laying off its older employees
last, and it increased its repairs and production for inventory;
US Steel also invested $10 million in repairs immediately upon conclusion
of the conference.[11] In
short, the biggest businesses were the first to agree.

Happily, the
depression was about over by the time these measures could take
effect, but an ominous shadow had been cast over any future depression,
a shadow that would grimly materialize when the 1929 crash arrived.
Once again, these measures bore the characteristic Hoover stamp;
the government compulsion and planning were larded with the rhetoric
of “voluntary cooperation.” He spoke of these and other suggested
measures as “mobilization of cooperative action of our manufacturers
and employers, of our public bodies and local authorities.” And
there came into use the now all too familiar war analogy: “An infinite
amount of misery could be saved if we have the same spirit of spontaneous
cooperation in every community for reconstruction that we had in
war.”

While the government
did not greatly intervene in the 1920–1921 recession, there were
enough ominous seeds of the later New Deal. In December 1920, the
War Finance Corporation was revived as an aid to farm exports, and
a $100 million Foreign Trade Financial Corporation was established.
Farm agitation against short-selling led to the Capper Grain Futures
Act, in August 1921, regulating trading on the grain exchanges.
Furthermore, on the state level, New York passed rent laws, restricting
the eviction rights of landlords; Kansas created an Industrial Court
regulating all key industries as “public utilities”; and the Non-Partisan
League conducted socialistic experiments in North Dakota.[12]

Perhaps the
most important development of all, however, was the President’s
Conference on Unemployment, called by Harding at the instigation
of the indefatigable Herbert Hoover. This was probably the most
fateful omen of antidepression policies to come. About 300 eminent
men in industry, banking, and labor were called together in September
1921 to discuss the problem of unemployment. President Harding’s
address to the conference was filled with great good sense and was
almost the swan song of the Old Order’s way of dealing with depressions.
Harding declared that liquidation was inevitable and attacked governmental
planning and any suggestion of Treasury relief. He said, “The excess
stimulation from that source is to be reckoned a cause of trouble
rather than a source of cure.”[13]

To the conference
members, it was clear that Harding’s words were mere stumbling blocks
to the wheels of progress, and they were quickly disregarded. The
conferees obviously preferred Hoover’s opening speech, to the effect
that the era of passivity was now over; in contrast to previous
depressions, Hoover was convinced, the government must “do something.”[14]
The conference’s aim was to promulgate the idea that government
should be responsible for curing depressions, even if the sponsors
had no clear idea of the specific things that government should
do. The important steps, in the view of the dominant leaders, were
to urge the necessity of government planning to combat depressions
and to bolster the idea of public works as a depression remedy.[15]
The conference very strongly and repeatedly praised the expansion
of public works in a depression and urged coordinated plans by all
levels of government.[16]
Not to be outdone by the new administration, former President Wilson,
in December, added his call for a federal public-works-stabilization
program.

The extreme
public-works agitators were disappointed that the conference did
not go far enough. For example, the economist William Leiserson
had thought that a Federal Labor Reserve Board “would do for the
labor market what the Federal Reserve Board did for the banking
interests.” But the wiser heads saw that they had made a great gain.
As a direct result of Hoover’s conference, twice as many municipal
bonds for public works were floated in 1921 and 1922 as in any previous
year; federal highway grants-in-aid to the states totaled $75 million
in the autumn of 1921, and American opinion was aroused on the entire
subject.

It was no accident
that the conference had arrived at its interventionist conclusions.
As usually happens in conferences of this type, a small group of
staff men, along with Herbert Hoover, actually prepared the recommendations
that the illustrious front men duly ratified.[17]
Secretary of the crucial Public Works Committee of the conference
was Otto Tod Mallery, for a long time the nation’s leading advocate
of public-works programs in depressions. Mallery was a member and
guiding spirit of the Pennsylvania State Industrial Board and Secretary
of the Pennsylvania Emergency Public Works Commission, which had
pioneered in public-works planning, and Mallery’s resolutions thoughtfully
pointed to the examples of Pennsylvania and California as beacon
lights for the federal government to follow.[18]

Mallery was
one of the leading spirits in the American Association for Labor
Legislation (AALL) an organization of eminent citizens and economists
devoted to the promotion of government intervention in the fields
of labor, unemployment, and welfare. The Association had held the
first national unemployment conference in early 1914. Now, its executive
director, John B. Andrews, boasted that the presidential conference’s
recommendations followed the standard recommendations formulated
by the AALL in 1915. These standard recommendations featured public
works and emergency public relief, at the usual hours and wage
rates – the wage rates of the boom period were supposed
to be maintained.[19] Neither
was the conference’s following of the AALL line a coincidence. Aside
from Mallery’s critical role, the conference also employed the expert
knowledge of the following economists, all of whom were officials
of the AALL: John B. Andrews, Henry S. Dennison, Edwin F. Gay,
Samuel A. Lewisohn, Samuel McCune Lindsay, Wesley C. Mitchell, Ida
M. Tarbell, Mary Van Kleeck, and Leo Wolman.[20]

It seems clear
that the businessmen at the conference were not supposed to mold
policy; their function was to be indoctrinated with the Hoover-AALL
line and then to spread the interventionist gospel to other business
leaders. Andrews singled out for particular praise in this regard
Joseph H. Defrees, of the United States Chamber of Commerce, who
appealed to many business organizations to cooperate with the mayors’
emergency committees, and generally to accept “business responsibility”
to solve the unemployment problem. President Samuel Gompers of the
American Federation of Labor (AF of L) also hailed the widespread
acceptance by industry of its “responsibility” for unemployment,
as an outcome of this conference.

Hoover
did his best to intervene in the recession, attempting also to stimulate
home construction and urging banks to finance more exports. Fortunately,
however, Harding and the rest of the cabinet were not convinced
of the virtues of governmental depression “remedies.” But eight
years later, Hoover was finally to have his chance. As Lyons concludes,
“A precedent for federal intervention in economic depression was
set, rather to the horror of conservatives.”[21]

It is, of course,
a sociological law that a government bureau, once launched, never
dies, and the conference was true to this law. The conference resolved
itself into three research committees, run by a staff of experts,
with Hoover in overall command. One project bore fruit in Leo Wolman’s
Planning and Control of Public Works, a pro–public works
study published in 1930. A second committee published a study on
Seasonal Operation in the Construction Industry, in 1924,
in cooperation with the Division of Building and Housing of the
Department of Commerce. This work urged seasonal stabilization of
construction, and was in part the result of a period of propaganda
activity by the American Construction Council, a trade association
headed by Franklin Delano Roosevelt. Its foreword was written by
Herbert Hoover.[22] The most
important project was a study of Business Cycles and Unemployment,
published in 1923.

Hoover invited
the National Bureau of Economic Research (headed by Wesley C. Mitchell)
to make a “fact-finding” study of the problems of forecasting and
control of business cycles, and then appointed a Committee on Business
Cycles to draft policy recommendations for the report. Chairman
of the committee was Owen D. Young, and other members included Edward
Eyre Hunt, who had been secretary of the President’s Conference,
Joseph Defrees, Mary Van Kleeck, Clarence Woolley, and Matthew Woll
of the AF of L. Funds for the project were considerately supplied
by the Carnegie Corporation. Wesley C. Mitchell, of the National
Bureau and AALL, planned and directed the report, which included
interventionist chapters by Mallery and Andrews on public works
and unemployment benefits, and by Wolman on unemployment insurance.
While the National Bureau was supposed to do only fact-finding,
Mitchell, in discussing his report, advocated “social experimentation.”[23]

Meanwhile,
Hoover had not been idle on the more direct legislative front. Senator
W.S. Kenyon of Iowa, in late 1921, introduced a bill supported by
Hoover, embodying recommendations of the conference and specifically
requiring a public-works-stabilization program. In the December
1921 hearings, the Kenyon Bill was supported by numerous leading
economists, as well as by the American Federation of Labor, the
American Engineering Council (of which Hoover had just been named
president), and the United States Chamber of Commerce. One of the
supporters was Wesley C. Mitchell. The bill never came to a vote,
however, largely due to healthy senatorial skepticism based on laissez-faire
ideas.

The next public-works-stabilization
bill before Congress was the Zihlman Bill in the House. This was
promoted by the National Unemployment League, formed in 1922 for
that purpose. Hearings were held in the House Labor Committee in
February 1923. Hoover backed the proposal, but it failed of adoption.

Finally, Hoover
presented the report on business cycles and unemployment to the
Congress, and strongly urged a public-works program in depressions.
Later, in 1929, Hoover’s Committee on Recent Economic Changes would
also support a public-works program.

In 1924, the
AALL continued its agitation. It participated in a national conference
proposing public-works planning. The conference was called by the
Federated American Engineering Societies in January. In 1923, Wisconsin
and Massachusetts were persuaded to adopt a stabilizing public-works
program. Massachusetts was directly swayed by testimony from the
ubiquitous Andrews and Mallery. These state programs were never
translated into effective action, but they did indicate the developing
climate. In January 1925, Hoover had the satisfaction of seeing
President Coolidge adopt his position. Addressing the Associated
General Contractors of America (a group that stood to gain by a
government building program), Coolidge called for public-works planning
to stabilize depressions. Senators George H. Pepper and James Couzens
tried to pass public-works-planning legislation in 1925 and 1926,
but they failed, along with later attempts by Senator Wesley Jones,
who submitted bills that had been drafted in Hoover’s Department
of Commerce. The Republican Senate was the most recalcitrant, and
one Pepper Bill was filibustered to death there. Even favorable
reports by its Commerce Committee could not sway the Senate. By
this time, not only Hoover and Coolidge, but also Secretary Mellon,
the Democratic Party in 1924, and later Governor Alfred E. Smith
of New York, had endorsed the public-works program. In May 1928,
Senator Robert F. Wagner (D, NY) introduced three bills for comprehensive
public-works planning, including the creation of an employment stabilization
board, but the plan was not considered by Congress.[24]

After Hoover
was elected president, he became more circumspect in presenting
his views, but he carried on the fight with renewed vigor. His technique
was to “leak” the “Hoover Plan” to trusted associates, who would
obviously be presenting Hoover’s views. He chose as his vehicle
Governor Ralph Owen Brewster of Maine. Brewster presented a public-works
plan to the Conference of Governors in late 1928, and waxed eloquent
about the plan as designed to “prevent depressions.”[25]

His use of
the term “Road to Plenty” was hardly a coincidence, for Hoover had
adopted the plan of Messrs. Foster and Catchings, which had recently
been outlined in their famous book, The Road to Plenty
(1928). The authors had submitted the plan to Brewster, and, after
Hoover’s endorsement, Brewster brought Professor William T. Foster
along to the Governors’ Conference as his technical advisor. Foster
and Catchings, bellwethers of inflation and the bull market and
leading underconsumptionists, had been closely involved in the public-works
agitation. Foster was director of the Pollak Foundation for Economic
Research, founded by investment banker Waddill Catchings. The pair
had published a series of very popular books during the 1920s, agitating
for such panaceas as public works and monetary inflation.[26]

Although seven
or eight governors were enthusiastic about the Hoover-Foster-Catchings
Plan, the conference tabled the idea. A large part of the press
hailed the plan in extravagant terms, as “prosperity insurance,”
a “prosperity reserve,” or as a “pact to outlaw depression”; while
more conservative organs properly ridiculed it as a chimerical and
socialistic effort to outlaw the law of supply and demand. It was
not surprising that William Green of the AF of L hailed the plan
as the most important announcement on wages and employment in a
decade, or that the AF of L’s John P. Frey announced that Hoover
had now accepted the old AF of L theory that depressions are caused
by underconsumption and low wages.[27]
The press reported that “labor is jubilant, because leaders believe
that the next President has found … a remedy for unemployment
which, at least in its philosophy and its groundwork, is identical
with that of labor.”[28]

The closeness
of Foster and Catchings to Hoover is again demonstrated by the detailed
account of their own plan that they published in April 1929. In
an article entitled “Mr. Hoover’s Plan: What It Is and What It Is
Not – A New Attack on Poverty,” they wrote authoritatively
that Hoover should wield a stabilization public-works reserve, not
of $150 million, as had often been mentioned in previous years,
but of the gigantic sum of $3 billion. This plan would iron out
prices and the business cycle, and stabilize business. At last,
scientific economics was to be wielded as a weapon by an American
president: “The Plan … is business guided by measurements
instead of hunches. It is economics for an age of science –
economics worthy of the new President.”[29]

The
Development of Hoover’s Interventionism: Labor Relations

We cannot fully
understand Hoover’s disastrous interference in the labor market
during the depression without tracing the development of his views
and actions on the labor front during the 1920s. We have seen that
his Reconstruction Program and his Economic Conference of 1920 praised
collective bargaining and unionism. In 1920, Hoover arranged a meeting
of leading industrialists with “advanced views” on labor relations
to try (unsuccessfully) to persuade them to “establish liaison”
with the American Federation of Labor.[30]
From 1919 through 1923, Hoover tried to persuade private corporations
to insure the uninsurable by adopting unemployment insurance, and
in 1925 he praised the American Federation of Labor as having “exercised
a powerful influence in stabilizing industry.” He also favored the
compulsory unemployment of a child labor amendment, which would
have lowered the national product, and raised labor costs as well
as the wages of competing adult workers.

Most important
of Hoover’s activities in the labor field was his successful war
against United States Steel and its chairman, Judge Elbert H. Gary,
a war conducted as a “skillful publicity campaign” (in the words
of a Hoover admirer) against “barbaric” hours of work in the steel
industry.[31] The success
of this battle made it much easier later on to persuade businessmen
to go along with his labor policies during the 1929 depression.
Hoover had decided that the 12-hour day in the steel industry must
be eradicated and replaced by the 8-hour day. He persuaded Harding,
lapsing from his usual laissez-faire instincts, to hold a conference
of steel manufacturers in May 1922, at which Harding and Hoover
called on the magnates to eliminate the 12-hour day. An admiring
biographer notes with satisfaction that Hoover made the steel leaders
“squirm.”[32] It was of course
easy for Harding and Hoover, far removed from the necessity of meeting
a payroll or organizing production, to tell other people how long
and under what conditions they should work. Hoover was supported
by such “enlightened” steelmen as Alexander Legge and Charles R.
Hook, but bitterly opposed by other leaders like Charles M. Schwab,
and of course by Judge Gary, chairman of the board of US Steel and
president of the American Iron and Steel Institute. The war was
on.

The steel agitation,
it should be pointed out, had not been begun by Hoover. It originated
back in September 1919, when Gary refused to engage in collective
bargaining with a workers’ union. The workers struck on that issue,
and the strike was led by Communist leader William Z. Foster. By
the time the strike had failed, in January 1920, public opinion,
properly regarding the strike as Bolshevik inspired, was squarely
on the side of US Steel. By this time, however, the Interchurch
World Movement had appointed a Commission of Inquiry into the strike;
the commission issued a report favorable to the strikers in July
1920, and thereby initiated the 8-hour day agitation.[33]
The report started a propaganda war, with the nation’s leftists
attempting to change the whole temper of public opinion. The Reverend
A.J. Muste, the Socialist New York Call, Labor,
and The Nation backed the report, while business associations
strongly attacked the inquiry. The latter included the National
Association of Manufacturers, the National Civic Federation, the
Wall Street Journal, and others. Many religious papers,
however, were persuaded by the prestige of the committee (a prestige
in religion that somehow carried over to secular matters) to change
their previous views and to line up on the antisteel side.

It was at this
critical point in the battle that Hoover entered the fray and persuaded
President Harding to join him. Hoover “deliberately broke the story”
of the unsuccessful private meeting with Gary, Schwab, and the others
to the press. He told the press that President Harding was “attempting
to persuade industry to adopt a reasonable working day.”[34]
Thus did the government mobilize public opinion on the side of the
union. Hoover managed to have the national Engineering Societies
– effectively dominated by Hoover – issue a report (again
outside of their competence) endorsing the 8-hour day in November
1922. Hoover eulogized the report, wrote the introduction, and persuaded
Harding to sign it.

Under the presidential
pressure, Judge Gary appointed a committee of the steel industry,
headed by himself, to study the question. The committee reported
on May 25, 1923, unanimously rejecting the 8-hour day demands. US
Steel also issued a reply to the Interchurch Report, written
by Mr. Marshall Olds, and endorsed by the prominent economist, Professor
Jeremiah W. Jenks. Abuse rained down on the steel industry from
all sides. Forgotten were the arguments used by US Steel, e.g.,
that the steel workers preferred the longer 12-hour day because
of the increased income, and that production would suffer under
an 8-hour schedule.[35]

This and other
arguments were swept away by the wave of emotionalism whipped up
over the issue. The forces of the Social Gospel hurled anathemas.
“Social Justice” and “Social Action” committees of Protestant, Catholic,
and Jewish organizations set up a clamor on issues about which they
knew virtually nothing. Attaching a quantitative codicil to the
qualitative moral codes of the Bible, they did not hesitate to declare
that the 12-hour day was “morally indefensible.” They did not elaborate
whether it had suddenly become “morally indefensible” or
whether it, and even longer work days, had also been morally wicked
throughout earlier centuries. If the latter, it was certainly strange
that countless preceding generations of churchmen had overlooked
the alleged sin; if the former, then a curious historical relativism
was now being mingled with the presumably eternal truths of the
Bible.

The American
Association for Labor Legislation of course entered the fray, and
threatened federal maximum-hour legislation if the steel industry
did not succumb to its imperious demands. But the most effective
blow was a stern public letter of rebuke sent to Gary by President
Harding on June 18, written for the president by Hoover. Faced by
Harding’s public requests and demands, Gary finally surrendered
in July, permitting Hoover to write the notice of triumph into Harding’s
Independence Day address.

The Hoover-Harding
victory over US Steel effectively tamed industry, which, faced by
this lesson, no longer had the fight to withstand a potent combination
of public and governmental pressures.[36]

Nor did this
exhaust Hoover’s labor interventionism during the 1920s. Hoover
played a major role in fostering railway unions, and in foisting
upon the railroad industry the Railway Labor Act – America’s
first permanent incursion of the federal government into labor-management
relations. The railroad problem had begun in World War I, when the
federal government seized control of the nation’s rails. Run by
Secretary of the Treasury McAdoo, the government’s policy was to
encourage unionization. After the war was over, the railway unions
tried their best to perpetuate this bastion of socialism, and advocated
the Plumb Plan, which called for joint operation of the railroads
by employers, unions, and the government.

The railroads
were returned to private owners in 1920, but Congress gave a dangerous
sop to the unions by setting up a Railroad Labor Board, with tripartite
representation, to settle all labor disputes. The board’s decisions
did not have the force of law, but they could exert an undue pressure
on public opinion. The unions were happy with this arrangement,
until the government representatives saw the light of economic truth
during the depression of 1921, and recommended reductions in wage
rates. The nonoperating railway unions conducted a nationwide strike
in defiance of the proposed reduction in the summer of 1922. While
Attorney General Daugherty acted ably in support of person and property
by obtaining a federal injunction against union violence, the “horrified”
Mr. Hoover, winning Secretary of State Hughes to his side, persuaded
Harding to force Daugherty to remove the injunction. Hoover also
intervened privately but insistently to try to wring pro-union concessions
from the railroads.

After the unions
lost their strike, they determined to rewrite the law so that they
could become established with the help of federal coercion. From
1923 on, the unions fought for a compulsory arbitration law. They
achieved this goal with the Railway Labor Act of 1926, which, in
effect, guaranteed collective bargaining to the railway unions.
The bill was drafted by union lawyers Donald Richberg and David
E. Lilienthal, and also by Herbert Hoover, who originated the idea
of the Railway Labor Mediation Board. Seeing the growing support
for such a law and lured by the promised elimination of strikes,
the bulk of the railroad industry surrendered and went along with
the bill. The Railway Labor Act – the first giant step toward
the collectivization of labor relations – was opposed by only
a few far-sighted railroads, and by the National Association of
Manufacturers.[37]

Even more mischievous
than Hoover’s pro-union attitude was his adoption of the new theory
that high wage rates are an important cause of prosperity. The notion
grew during the 1920s that America was more prosperous than other
countries because her employers generously paid higher
wage rates, thus insuring that workers had the requisite purchasing
power to buy industry’s products. While high real wage rates are
actually the consequence of greater productivity and capital
investment, this theory put the cart before the horse by claiming
that high wage rates were the cause of high productivity
and living standards. It followed, of course, that wage rates should
be maintained, or even raised, to stave off any threatening depression.
Hoover began championing this theory during the Unemployment Conference
of 1921. Employers on the manufacturing committee wanted to urge
lowering wage rates as a cure for unemployment, but Hoover successfully
insisted on killing this recommendation.[38]
By the mid-1920s, Hoover was trumpeting the “new economics” and
attacking the “old economics” that resisted the new dispensation.
In a speech on May 12, 1926, Secretary Hoover spread the gospel
of high wage rates that was to prove so disastrous a few years later:

not so
many years ago – the employer considered it was in his
interest to use the opportunities of unemployment and immigration
to lower wages irrespective of other considerations. The lowest
wages and longest hours were then conceived as the means to
obtain lowest production costs and largest profits ….
But we are a long way on the road to new conceptions. The very
essence of great production is high wages and low prices, because
it depends upon a widening … consumption, only to be obtained
from the purchasing-power of high real wages and increased standards
of living.[39]

Hoover was
not alone in celebrating the “new economics.” The National Industrial
Conference Board reported that, while during the 1920–1921 depression,
wage rates fell by 19 percent in one year, the high-wage theory
had taken hold from then on. More and more people adopted the theory
that wage-cutting would dry up purchasing power and thus prolong
the depression, while wage rates held high would quickly cure business
doldrums. This doctrine, allied with the theory that high wage rates
cause prosperity, was preached by many industrialists, economists,
and labor leaders throughout the 1920s.[40]
The Conference Board reported that “Much was heard of the dawn of
a new era in which major business depressions could have no place.”
And Professor Leo Wolman has stated that the prevailing theory during
the 1920s was that “high and rising wages were necessary to a full
flow of purchasing power and, therefore, to good business.”[41]

As the final
outgrowth of the famous conference of 1921, Hoover’s Committee on
Recent Economic Changes issued a general multivolume report on the
American economy in 1929. Once again, the basic investigations were
made by the National Bureau. The committee did not at all foresee
the Great Depression. Instead, it hailed the price stability of
the 1920s and the higher wages. It celebrated the boom, little realizing
that this was instead its swan song: “with rising wages and relatively
stable prices we have become consumers of what we produce to an
extent never before realized.” In the early postwar period, the
committee opined, there were reactionary calls for the “liquidation”
of labor back to prewar standards. But, soon, the “leaders of industrial
thought” came to see that high wages sustained purchasing power,
which in turn sustained prosperity.

They began
consciously to propound the principle of high wages and low
costs as a policy of enlightened industrial practice. This principle
has since attracted the attention of economists all over the
world – its application on a broad scale is so novel.[42]

This change
in the industrial climate, according to the committee, came about
in a few short years, largely due to the influence of the Conference
on Unemployment. By the fall of 1926, steel magnate Eugene Grace
was already heralding the new dispensation in the Saturday Evening
Post.[43]

The conclusions
of the Hoover-appointed economic committee were ominous in their
own right. “To maintain the dynamic equilibrium” of the 1920s, it
declared, leadership must be at hand to provide more and more “deliberate
public attention and control.” In fact, “research and study, the
orderly classification of knowledge … well may make complete
control of the economic system a possibility.” To maintain the equilibrium,
“We … [must] develop a technique of balance,” the technique
to be supplied by economists, statisticians, and engineers, all
“working in harmony together.”

And so, President
Herbert Hoover, on the eve of the Great Depression, stood ready
to meet any storm warnings on the business horizon.[44]
Hoover, the “great engineer,” stood now armed on many fronts with
the mighty weapons and blueprints of a “new economic science.” Unfettered
by outworn laissez-faire creeds, he would use his “scientific” weapons
boldly, if need be, to bring the business cycle under governmental
control.

Hoover did
not fail to employ promptly and vigorously his “modern” political
principles, or the new “tools” provided him by “modern” economists.
And, as a direct consequence, America was brought to her knees as
never before. Yet, by an ironic twist of fate, the shambles that
Hoover abandoned when he left office was attributed, by Democratic
critics, to his devotion to the outworn tenets of laissez-faire.

Notes

[1]
For an appreciation of the importance of this fact for American
monetary history, see Vera C. Smith, The Rationale of Central
Banking (London: P.S. King and Son, 1936).

[2]
From his acceptance speech on August 11, and his campaign speech
at Des Moines on October 4. For a full account of the Hoover speeches
and antidepression program, see William Starr Myers and Walter
H. Newton, The Hoover Administration (New York: Scholarly
Press, 1936), part 1; William Starr Myers, ed., The State
Papers of Herbert Hoover, (New York. 1934), vols. 1 and 2.
Also see Herbert Hoover, Memoirs of Herbert Hoover (New
York: Macmillan, 1937), vol. 3.

[3]
See Joseph Dorfman, The Economic Mind in American Civilization
(New York: Viking Press, 1959), vol. 14, p. 27.

[4]
Hoover, Memoirs, vol. 2, p. 29. Hoover’s evasive rhetoric
is typical: “I insisted that these improvements could be effected
without government control, but the government should cooperate
by research, intellectual leadership [sic], and prohibitions
upon the abuse of power.”

[5]
Cf. Arthur M. Schlesinger, Jr., The Crisis of the Old Order,
1919–1933 (Boston: Houghton Mifflin, 1957), pp. 81ff.; Harris
Gaylord Warren, Herbert Hoover and the Great Depression
(New York: Oxford University Press, 1959), pp. 24ff.

[6]
Hoover records that the “extreme right” was hostile to these proposals
– and understandably so – and notably the Boston Chamber
of Commerce. Also see Eugene Lyons, Our Unknown Ex-President
(New York: Doubleday, 1948), pp. 213–14.

[7]
Hoover to Wesley C. Mitchell, July 29, 1921. Lucy Sprague Mitchell,
Two Lives (New York: Simon and Schuster, 1953), p. 364.

[8]
Warren, Herbert Hoover and the Great Depression, p. 26.

[9]
See Hoover, Memoirs, vol. 2; Warren, Herbert Hoover
and the Great Depression; and Lloyd M. Graves, The Great
Depression and Beyond (New York: Brookmire Economic Service,
1932), p. 84.

[10]
Hoover, Memoirs, vol. 2, pp. 41–42.

[11]
See Joseph H. McMullen, “The President’s Unemployment Conference
of 1921 and its Results” (unpublished M.A. thesis, Columbia University,
1922), p. 33.

[12]
See Graves, The Great Depression and Beyond.

[13]
See E. Jay Howenstine, Jr., “Public Works Policy in the Twenties,”
Social Research (December, 1946): 479–500.

[14]
See Lyons, Our Unknown Ex-President, p. 230.

[15]
In reality, public works only prolong the depression, aggravate
the malinvestment problem, and intensify the shortage of savings
by wasting more capital. They also prolong unemployment by bolstering
wage rates. See Mises, Human Action (New Haven, Conn.:
Yale University Press, 1949), pp. 792–94.

[16]
The payment of charity wages as high as market rates began in
the depression of 1893; public works as a depression remedy started
on a municipal scale in the recession of 1914–1915. The secretary
of Mayor John Purroy Mitchell’s New York Committee on Unemployment
urged public works in 1916, and Nathan J. Stone, chief statistician
of the US Tariff Board, urged a national public works and employment
reserve in 1915. Immediately after the war, Governor Alfred E.
Smith of New York and Governor Frank O. Lowden of Illinois urged
a national public-works-stabilization program. See Raphael Margolin,
“Public Works as a Remedy for Unemployment in the United States”
(unpublished M.A. thesis, Columbia University, 1928).

[17]
McMullen, “The President’s Unemployment Conference of 1921 and
its Results,” p. 16.

[18]
Pennsylvania had established the first public-works-stabilization
program in 1917, largely inspired by Mallery; it was later repealed.
Mallery had also been made head of a new Division of Development
of Public Works by States and Cities
During the Transition Period, in the Wilson administration. See
Dorfman, The Economic Mind in American Civilization,”
vol. 4, p. 7.

[19]
See John B. Andrews, “The President’s Unemployment Conference
– Success or Failure?” American Labor Legislation Review
(December, 1921): 307–10. Also see “Unemployment Survey,” in ibid,
pp. 211–12.

[20]
American Labor Legislation Review (March, 1922): 79.
Other officials of the AALL included: Jane Addams, Thomas L. Chadbourne,
Professor John R. Commons, Professor Irving Fisher, Adolph Lewisohn,
Lillian Wald, Felix M. Warburg, Woodrow Wilson, and Rabbi Stephen
S. Wise.

[21]
Lyons, Our Unknown Ex-President, p. 230.

[22]
The American Construction Council was formed in response to the
hounding of the New York construction industry by state and federal
authorities during the depression of 1920–1921. The governments
charged the industry with “price-fixing” and “excessive profits.”
Hoover and Roosevelt together formed the council in the summer
of 1922, to stabilize and organize the industry. The aim was to
cartelize construction, impose various codes of operation and
“ethics,” and to plan the entire industry. Franklin Roosevelt,
as president of the council, took repeated opportunity to denounce
profit seeking and rugged individualism. The “codes of fair practice”
were Hoover’s idea. See Daniel R. Fusfeld, The Economic Thought
of Franklin D. Roosevelt and the Origins of the New Deal
(New York: Columbia University Press, 1956), pp. 102ff.

[23]
Wesley C. Mitchell, “Unemployment and Business Fluctuations,”
American Labor Legislation Review (March, 1923): 15–22.

[24]
The following economists, businessmen, and other leaders had by
now served as officers of the American Association for Labor Legislation,
in addition to those named above: Ray Stannard Baker, Bernard
M. Baruch, Mrs. Mary Beard, Joseph P. Chamberlain, Morris Llewellyn
Cooke, Fred C. Croxton, Paul H. Douglas, Morris L. Ernst, Herbert
Feis, S. Fels, Walton H. Hamilton, William Hard, Ernest M. Hopkins,
Royal W. Meeker, Broadus Mitchell, William
F. Ogburn, Thomas I. Parkinson, Mrs. George D. Pratt, Roscoe Pound,
Mrs. Raymond Robins, Julius Rosenwald, John A. Ryan, Nahum I.
Stone, Gerard Swope, Mrs. Frank A. Vanderlip, Joseph H. Willits,
and John G. Winant.

[25]
Ralph Owen Brewster, “Footprints on the Road to Plenty –
A Three Billion Dollar Fund to Stabilize Business,” Commercial
and Financial Chronicle (November 28, 1928): 25–27.

[26]
The Foster-Catchings Plan called for an organized public-works
program of $3 billion to iron out the business cycle and stabilize
the price level. Individual initiative, the authors decided, may
be well and good, but in a situation of this sort “we must have
collective leadership.” William T. Foster and Waddill Catchings,
The Road to Plenty (Boston: Houghton Mifflin, 1928),
p. 187. For a brilliant critique of the underconsumptionist theories
of Foster and Catchings, see F.A. Hayek, “The ‘Paradox’ of Savings,”
in Profit, Interest, and Investment (London: Routledge
and Kegan Paul, 1939), pp. 199–263.

[27]
See Dorfman, The Economic Mind in American Civilization,
vol. 4, pp. 349–50.

[28]
“Hoover’s Plan to Keep the Dinner-Pail Full,” Literary Digest
(December 8, 1928): 5–7.

[29]
William T. Foster and Waddill Catchings, “Mr. Hoover’s Plan –
What It Is and What It Is Not – The New Attack on Poverty,”
Review of Reviews (April, 1929): 77–78. For a laudatory
survey of Hoover’s pro–public works views in the 1920s, by an
official of the AALL, see George H. Trafton, “Hoover and Unemployment,”
American Labor Legislation Review (September, 1929):
267ff.; and idem, “Hoover’s Unemployment Policy,” American
Labor Legislation Review (December, 1929): 373ff.

[30]
Irving Bernstein, The Lean Years: A History of the American
Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), p. 147.
As early as 1909, Hoover had called unions “proper antidotes for
unlimited capitalistic organizations,” ibid., p. 250.

[31]
Warren, Herbert Hoover and the Great Depression, p. 28.

[32]
Lyons, Our Unknown Ex-President, p. 231.

[33]
See Marshall Olds, Analysis of the Interchurch World Movement
Report on the Steel Strike (New York: G.P. Putnam and Sons,
1922), pp. 417ff.

[34]
Lyons, Our Unknown Ex-President, p. 231.

[35]
Also forgotten was the fact that wages were involved
in the struggle, as well as hours. The workers wanted shorter
hours with a “living wage,” or as the Inquiry Report
put it, “a minimum comfort wage” – in short, they wanted
higher hourly wage rates. See Samuel Yellen, American Labor
Struggles (New York: S.A. Russell, 1956), pp. 255ff.

[36]
On the 12-hour day episode, see Frederick W. MacKenzie, “Steel
Abandons the 12-Hour Day,” American Labor Legislation Review
(September, 1923): 179ff.; Hoover, Memoirs, vol. 2, pp.
103–04; and Robert M. Miller, “American Protestantism and the
Twelve-Hour Day,” Southwestern Social Science Quarterly
(September, 1956): 137–48. In the same year, Governor Pinchot
of Pennsylvania forced the anthracite coal mines of that state
to adopt the eight-hour day.

[37]
For a pro-union account of the affair, see Donald R. Richberg,
Labor Union Monopoly (Chicago: Henry Regnery, 1957),
pp. 3–28; also see Hoover, Memoirs, vol. 2.

[38]
See McMullen, “The President’s Unemployment Conference of 1921
and its Results,” p. 17.

[39]
Hoover, Memoirs, vol. 2, p. 108.

[40]
One of these industrialists was the same Charles M. Schwab, head
of Bethlehem Steel, who had bitterly fought Hoover in the 8-hour
day dispute. Thus, in early 1929, Schwab opined that the way to
keep prosperity permanent was to “pay labor the highest possible
wages.” Commercial and Financial Chronicle 128 (January
5, 1929): 23.

[41]
National Industrial Conference Board, Salary and Wage Policy
in the Depression (New York: Conference Board, 1932), p.
3; Leo Wolman, Wages in Relation to Economic Recovery
(Chicago: University of Chicago Press, 1931), p. 1.

[42]
Committee on Recent Economic Changes, Recent Economic Changes
in the United States (New York: McGraw-Hill, 1929), vol.
1, p. xi.

[43]
Committee on Recent Economic Changes, Recent Economic Changes
in the United States, (New York: McGraw-Hill, 1929), vol.
2; Henry Dennison, “Management,” p. 523.

[44]
Another important foretaste of the later National Recovery Act
(NRA) was Hoover’s use of the Department of Commerce during the
1920s to help trade associations form “codes,” endorsed by the
Federal Trade Commission (FTC), to curtail competition in the
name of eliminating “unfair” trade practices.

Murray
N. Rothbard
(1926–1995) was the author of Man,
Economy, and State
, Conceived
in Liberty
, What
Has Government Done to Our Money
, For
a New Liberty
, The
Case Against the Fed
, and many
other books and articles
. He was
also the editor – with Lew Rockwell – of The
Rothbard-Rockwell Report
.

Murray
Rothbard Archives

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