Adam Smith’s economic theory brought years of Coolidge prosperity. It also brought on the 1929 stock market crash. The Legacy of Herbert Hoover still suffers for it.
How did a man whose name was considered synonymous with efficiency and problem solving end up as the goat of the Great Depression? Herbert Hoover was the epitome of the self-made man in the early 20th Century. The electorate of the United States considered Hoover a natural to extend the years of Coolidge prosperity in 1928. At the onset of the Great Depression, Hoover could not have known the seriousness of the crisis. His administration’s actions to remedy the crisis certainly reflect that. However, could anyone else have succeeded under the same conditions? Considering the Depression’s economic roots and the structure of American industry and agriculture, it is likely that any administration would have met with the same fate as that of Herbert Hoover.
America was no stranger to economic depression when Herbert Hoover took office. The prevailing economic theory on depression had been to weather the storm. Hoover did not subscribe to this theory, but he was in the minority. His Treasury secretary, Andrew Mellon, believed that the 1929 stock market crash and subsequent Depression was the economy naturally cleansing itself of weaker elements. Mellon’s attitude reflects the “invisible hand” theory of economics espoused by Adam Smith. It was Smith’s theory that shaped the laissez-faire economic policies of the prosperous 1920’s and before. These policies, through depressions and prosperity, had altered the structure of American industry and agriculture. Following the 1929 stock market crash, these conditions had created a crisis that was far worse than policy makers had experienced in the past.
Laissez-Faire economic policy allowed for rapid industrialization to take place without government regulation, and marketplace competition suffered as a result. Competition was hindered further by previous periods of economic contraction, such as the depression of 1893. Only the larger companies survived periods of economic contraction, and the larger companies began to structure themselves differently in order to consolidate their operations. Large companies sought to control all processes in production, or vertical integration, in order to increase efficiency and protect themselves from future economic shocks. Other companies sought to monopolize their markets. These structures allowed for the lowering of prices that smaller companies could not match.
The structure of American agriculture following WWI was precarious to say the least. Following the war, the demand for American agriculture evaporated. The lack of demand left American farmers with too much product, keeping prices very low. Farmers that the government had encouraged to borrow and increase production before the war were unable to make enough money to pay for their land, labor, and equipment. Industrialization had shifted the nature of the economy away from agriculture, and without government intervention, farmers never experienced the Coolidge propserity years.
It was during this time that an exodus of agricultural workers to urban areas took place. Along with increased immigration, there was a surplus of labor for American industry. The new concentrated nature of industry required fewer workers and allowed wages to remain relatively low despite large increases in productivity. Despite the perceptions inspired by the years of Coolidge prosperity in the 1920’s, unemployment was a pervasive issue. The persistence of these trends contributed to growing disparity of income in America.
The Hoover administration, equipped with belief that the cycles of prosperity and contraction were a natural phenomenon, could not have anticipated the seriousness of the Great Depression. The change in the structure of the American economy was its natural evolution. Even the courts prevented most attempts of policy makers to engage in regulation that may have prevented collapse, or at least kept the problem from becoming so pervasive. The depth of the economic collapse could not have been envisioned, nor did the tools exist to fix it had policy makers recognized it. The entrenched nature of laissez-faire economic policy prevented any such action. These factors left the Hoover administration ill equipped to deal with the Great Depression. Even with his vast experience, Herbert Hoover was doomed to failure.
- McElvaine, Robert S. The Great Depression: America, 1929-1941. Three Rivers Press: New York, 1993.