Sunday, May 15, 2011

Were Mellon and Hoover Liquidationists?

Josh Green's profile in The Atlantic of Ron Paul contains this section on interpreting Great Depression era policies:

The Austrian school had peaked in the early 20th century but had fallen away after the Great Depression, which it claimed was caused by an expansion of the money supply and could be met only with chastened submission as the market corrected itself. Herbert Hoover’s Treasury secretary, Andrew Mellon, offered similar counsel, famously urging Hoover to “liquidate” and “purge the rottenness out of the system.” But this failed to stop the catastrophe. Only when Roosevelt took the dollar off the gold standard and committed to deficit spending, and the Fed adopted consistently low interest rates, did the economy finally start to recover. This validated the argument of the Austrians’ intellectual adversaries, economists like John Maynard Keynes, that rather than stand aside, governments should intervene to mitigate recessions.

The idea that Mellon advocated "liquidation," and that the adherence to this strategy were among the major contributors to the depth of the Great Depression are widely held views. However, they are simply not true, as Lawrence White explains.

First, the quotations attributed to Mellon in fact come from Hoover's own autobiography. Here's what Hoover had to say:

First was the “leave it alone liquidationists” headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

While apparently damning, White explains that this passage was primarily intended to highlight the differences between Mellon's views and those of Hoover. The "quotations" likely do not reflect Mellon's actual words, but are rather exaggerated for effect.

While Mellon recognized the need for painful readjustments, he was in reality not the extreme liquidationist portrayed either by Hoover or Josh Green. He supported successive interest rate cuts by the Federal Reserve, and tax cuts and spending measures by the Federal Government.

Nor did Hoover follow a liquidationist policy either. Rather, as his own autobiography and the historical record amply demonstrate the extent of his intervention in the economy. Deficit-fueled spending grew dramatically under his tenure. Among many other initiatives, Hoover's Reconstruction Finance Corporation lent billions to banks, states, and other firms.

In fact; it was Roosevelt who re-introduced fiscal balance by 1937-8. This period also saw dramatic monetary tightening by the Federal Reserve, a move convincingly linked to a recession that began at that point.

Though tempting to think of historical figures solely through a stark moral lens, the lessons of the 1930s are more complicated than commonly realized. Far from being a stark "liquidationist," both Hoover and Mellon worked to orchestrate dramatic federal interventions that nonetheless failed to secure recovery. More durable recovery happened under Roosevelt; but even under his tenure Federal Reserve officials erred badly in sharply contracting the money supply and plunging the country into a new downturn. Finally, federal interventions by both Hoover and Roosevelt that regulated prices and wages throughout the economy likely had negative effects on economic recovery.

While analyzing the beliefs of long-dead historical actors may be tedious, the depth and duration of the current crisis have brought increased relevance to the actions of Great Depression-era policymakers who faced similar problems. Their actions, real or perceived, continue to inform policy debates today. That's why it's important to set the record straight on their actual policies.

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