How Herbert Hoover stabilized the American business cycle

If you asked many Americans for their opinion on Herbert Hoover and his presidency, you’d likely be met with unfamiliarity or indifference towards the 31st president of the United States. Those who do recognize Hoover will likely associate him with the Great Depression, and his (very) limited effectiveness in helping the nation weather the global economic catastrophe that occurred during his administration. Although it is a bit unfair to solely associate Hoover with the depression, politics has rarely been a game played fairly, and this reputation dogs him and his legacy to this day. To rectify Hoover’s reputation slightly, and because much ink has been spilled regarding the Great Depression, we’ll be covering a different 20th century economic crisis that Hoover experienced firsthand.

The year is 1920 and the “Spanish” influenza epidemic is beginning to wind down. Over 25% of the United States had been infected, and global fatalities were estimated at 50 million people. In such cheery times, who wouldn’t want a national economic crash as a chaser to WWI and global pestilence? Cue the recession of 1920-21. Like many crises, the recession of 1920-21 has a few contributing factors which have varying degrees of significance depending on your outlook. The demobilization of the U.S. military increasing the domestic labor supply, tighter monetary policy in response to post-war inflation, and Europe’s economic recovery from the ravages of war are all considered primary factors towards the downturn. Rather than join the chorus of economic historians and root out which factor caused the most damage, we will instead focus on a couple consequences of the crash and how Mr. Hoover relates to this in any capacity.

With WWI raging the demand for American goods increased as our continent, and industrial capacity, was spared the devastation experienced by Europe. To any readers who remember the past 5 years, the ingredients of increased demand coupled with reduced supply is a recipe for inflation. Predictably, and familiarly, the Federal Reserve drastically increased interest rates to combat inflation and tighten monetary policy. Exacerbation of this tighter monetary policy also came from a key difference between the dollar of today and the dollar of 1920. This difference is due to the U.S. being on the gold standard in 1920. For those who may not know, in simple terms the gold standard meant paper money was backed by gold and could be readily redeemed into gold at the regional branches of the Federal Reserve. In the inflationary leadup to 1920, it made a lot of sense for Americans to exchange dollars for gold since their paper currency was losing significant purchasing power to inflation. This had a double-whammy effect of reducing the money supply while the Federal Reserve was undertaking its own campaign to curb inflation with higher interest rates. Combine this severe monetary tightening with a flood of soldiers rejoining the workforce and European production increasing, and America suddenly swung from an inflationary economic environment to roughly 15% deflation in the space of a single year as labor costs and product prices shrunk with the increased supply of labor and European goods. For some context, the single worst deflationary year of the Great Depression was 10.3%. Although the sum total of deflation is greater when combining all years of the Great Depression, none were as singularly severe as the drop seen in 1920-21. With the price of goods dropping, and wholesale prices falling almost 37%, many producers hesitated to increase production or invest in their businesses. After all, why should they pay to produce a widget now when it will cost less to produce it later? Worse still, how could manufacturers know that deflation wouldn’t continue and that any widgets they make this month will have to be sold at a loss next month because prices continue to fall?

At this point a keen reader might note that the percentages given in the prior paragraph are mostly given with the caveat that they are only approximate values. This is not because I want to be vague in my writing or math, but because the data itself is quite difficult to source. The reason behind this is quite simple, the U.S. government did not track economic data like we do today. Instead, economic data was gathered via the Census Bureau surveying manufacturers every five years and semiannually by the Bureau of Labor Statistics gathering information on wages and prices. Cue Herbert Hoover. Appointed to be Secretary of Commerce in early 1921 by the newly elected Harding administration, Hoover ambitiously sought to do something with his relatively unimportant cabinet position. Although his time in the Commerce department is largely known for infrastructure projects, it’s no accident that Hoover Dam shares his name, Hoover had a range of other accomplishments from industrial standardization, disaster relief, and the development of major electricity and radio systems. In conjunction with his desire to standardize industry and increase efficiency of production and investments, Hoover also wanted the government to pursue data driven decision making and to provide business leaders with more current economic data. Consequently, Hoover had the Commerce Department publish a monthly report known as the “Survey of Current Business.” Contained within the report is a breakdown of price indexes and economic data on a national level, regional level, and industry level. If you desire, an archive of every Survey of Current Business produced by the Commerce Department can be found here. The Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditures price index, or PCE, and it comes from the Survey of Current Business. To this day, the PCE factors heavily in the Fed’s decision making regarding monetary policy.

In the same way that multiple factors contributed to the crisis of 1920-21, multiple efforts contributed towards the reversal of this economic collapse. Although Hoover’s Survey of Current Business was not the primary economic savior, that laurel likely belongs to the Fed for loosening monetary policy, it did aid manufacturers and encourage them to stimulate investment around the nation by providing them with fresh data to indicate that the worst of the deflation was in the past. With the major deflationary hurdle cleared, the economic environment of America sprang into action and kicked off nearly a decade of exuberance that we now refer to as “The Roaring Twenties.” What could possibly go wrong?

Although this accomplishment probably does not fully rehabilitate Hoover’s reputation, you can thank Herbert for providing the underlying framework of data next time you hear the news channel bemoan the most recent Federal Reserve inflation decision.

-TMJ