Discussion Topic
The role of President Hoover's administration in the onset of the Great Depression
Summary:
President Hoover's administration played a significant role in the onset of the Great Depression through policies that failed to address the economic downturn effectively. Hoover's belief in limited government intervention and his reliance on voluntary cooperation from businesses and charities were inadequate in countering the severe economic collapse, leading to widespread unemployment and financial instability.
Did Hoover's administration cause the Great Depression?
No, Hoover's policies were not the cause of the Great
Depression---though they may have made it worse.
The consensus among economists and historians as to the cause of the Great
Depression is that the stock market panic of 1929 triggered a financial crisis
which threw hundreds of banks into insolvency. Droughts also contributed by
reducing food production and raising food prices.
The response---or lack thereof---was crucial to what made the Great
Depression so great. Banks were allowed to fail; the FDIC did not yet exist to
insure banks against failure. This created a cascade through the financial
system, where suddenly billions of dollars effectively evaporated from
existence as the collapse of one bank which owed to another bank collapsed the
next bank, and so on. There was effectively far less money supply than there
had been previously, so there was not enough money to purchase the products
being sold. Because the US was still on the classical gold standard, the
Federal Reserve had very little power to expand the money supply.
This led to deflation, which made debts even worse, and also triggered layoffs
because workers are loathe to accept lower nominal wages even if their
inflation-adjusted wage has not changed.
Hoover was also quite conservative in terms of his fiscal policy response; he
could have initiated huge government investment projects to employ workers and
increase spending---as FDR would later do in the New Deal---but he largely
avoided doing so, believing that the market would simply correct itself in due
time and any such intervention would do more harm than good. He also adamantly
refused to engage in deficit spending, even though a depression is exactly the
time when deficit spending is necessary.
Hoover cannot be blamed for the stock market panic itself, and of course he
cannot be blamed for droughts. So in that sense he did not cause the Great
Depression. But his response was far too passive and ineffectual, and
resulted in a much more prolonged and severe depression than would have
occurred under better fiscal and monetary policy.
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