Arnold Kling  

Was Roosevelt the real Hoover?

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Price V. Fishback and John Joseph Wallis write,


Federal budget outlays in real dollars rose 88 percent under Hoover between 1929 and 1932, faster than the growth in the first three years under Roosevelt (although starting from a lower base). Budget deficits under Hoover look more Keynesian than Roosevelt's deficits, although likely not by Hoover's design.

The conventional wisdom is that Herbert Hoover sat back and did nothing, and then Roosevelt cured the Depression with the New Deal. In fact, I think that economic historians tend to see both Presidents making similar mistakes. The most common view among economists today is that going off the gold standard was President Roosevelt's best policy move, while many of the other New Deal policies, most especially the National Recovery Administration, were a hindrance.

I was not aware of this interpretation:


Some financial legislation gave new powers to the Treasury, which were sought as a means of undermining the monetary authority of the Federal Reserve System; as a result, the Fed lost power over monetary policy after 1933 and did not regain it until 1951 (Calomiris and Wheelock 1998).

The essence of the Fishback/Wallis paper is that the American political system supported allowing discretion at the state and local level while imposing rules that limit discretion at the Federal level. They conclude:


As of early 2012, it appears that the EU is attempting to move towards changing their political union in a manner that creates rules for the member states and discretion for the center. This is exactly the opposite of the long run American experience where rules for the center and discretion within the rules for the member states have been the common pattern.

I am not sure that the case for this political interpretation of the New Deal is terribly solid. I do not have a strong reason to disagree, but I worry that along the way the authors perhaps made some rather cavalier moves in choosing how to classify various programs in terms of how they did or did not change precedents and how they were or were not rule-bound.


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CATEGORIES: Economic History



COMMENTS (1 to date)
Mark Bahner writes:
Some financial legislation gave new powers to the Treasury, which were sought as a means of undermining the monetary authority of the Federal Reserve System; as a result, the Fed lost power over monetary policy after 1933 and did not regain it until 1951 (Calomiris and Wheelock 1998).

When I was taking economics courses (in the late 1970s) the conventional wisdom was that the required reserves ratio was almost too powerful for the Fed to use (it was referred to as the "atomic bomb" of Fed tools).

So it came as a real surprise to me that, during a course on the history of the Depression, I learned that the Fed *raised* the require reserves ratio in 1936 and 1937. (My economics courses taught that this would severely contract the money supply.)

This seems still to be the overall assessment of the situation:

"Federal Reserve Requirement Debacle of 1935-1938"

The Fed Board, under the urging of the Fed Bank of New York, raised reserve requirements by 50 percent in August 1936. The increase, as far as the banks were concerned, made half—$1.5 billion—of their existing reserves unavailable. However, they still had excess legal reserves of $1.5 billion. So the Fed Board in early 1937 raised requirements again, effective in March and May, to “mop up” the remaining legal excess. The total volume of reserves moved from “excess” to “required” came to $3 billion.

So I think that, rather than the Federal Reserve "losing power over the money supply," the Fed actually caused a significant contraction in the money supply, right in the middle of the Depression.

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