Paul Krugman’s recent column misleads its readers on Great Depression history. He writes:
When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.”
This implies Hoover followed Mellon’s advice, and that doing so tanked the economy into the Great Depression. Let’s examine the historical record.
The market crashed in 1929. Rather than allowing the liquidation of the unnecessary parts of the economy, as Mellon suggested, Hoover worked feverishly to prevent such equilibration. He labored to prop up prices and wages, and pumped money into the economy by keeping interest rates down rather than letting them rise to their natural level.
During that year he pushed through the Agricultural Marketing Act, funneling half a billion dollars to prop up crop prices, and inflated credit by almost $300 million.
More, he pushed for government and big business to work together. In November of 1929, notes historian Paul Johnson, Hoover held a series of meetings with key industrial leaders in which “he exacted promises not to cut wage levels–even to increase them, if possible–which were kept until 1932.” Johnson notes that these policies were lauded by labor unions, and by John Keynes himself. In a letter to Britain’s Labour Prime Minister, Keynes praised Hoover’s record in maintaining wage levels and thought the credit expansion was “thoroughly satisfactory.”
More, as Megan McArdle asserts, Hoover ballooned government spending:
According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before. In 1930 it was $3.3 billion. In 1931, Hoover raised spending to $3.6 billion. And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget). As a percentage of GDP, spending rose from 3.4% in 1930 to 8% in 1933–an increase larger than the increase under FDR, though of course thankfully under FDR, the denominator (GDP) had stopped shrinking.
Much of the increase in 1931 was made up of a rise in transfer payments, and that same year Hoover initiated the Reconstruction Finance Corporation, in addition to other major public works. “More major public works were started in Hoover’s four years than in the previous thirty,” avers Johnson.
Hardly, then, did Hoover follow a “laissez faire” approach.
The truth is Hoover was an interventionist. Perhaps if he had followed the prescription of 1920 the Depression may not have been Great.