• 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    thought considers such a dictum hopelessly outdated; instead,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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