1930–1933: The Great Depression and the End of 'Orthodoxy' (A)

43 Pages Posted: 28 Oct 2019

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Abstract

In February 1933, President Herbert Hoover reviewed the past four years of his administration. He had met a stock market crash and a recession that worsened into the Depression with actions out of the playbook of Republican “orthodoxy”: balanced budgets, tax reduction, protectionism, and community relief based on volunteerism. Yet as the Depression deepened, Hoover pivoted toward policies that pushed the limits of his own philosophy: debt financing of fiscal deficits, government investment in private enterprises, social relief, debt moratoriums, and public works spending to promote employment. None of these actions had halted the worsening economic news. In November 1932, New York governor Franklin D. Roosevelt defeated Hoover in the presidential election.

Now, in the interregnum before the transfer of office on March 4, 1933, economic conditions turned suddenly worse. Consumers and business leaders deferred spending until the new administration outlined its policies. Hoover sought Roosevelt's support for policies and actions to address the crisis. What should Hoover do or say to elicit that support? The answers lay in careful diagnosis of the problems and prioritization of remedies. Opinion was divided on the question of whether demand shocks or supply shocks had caused the Great Depression—each would dictate different policy actions. What was the appropriate diagnosis? What should be the remedies? The A case presents the dominant narrative; a suggested B case provides correspondence between Hoover and Roosevelt.

Excerpt

UVA-F-1904

Oct. 15, 2019

1930–1933: The Great Depression and the End of “Orthodoxy” (A)

In February 1933, President Herbert Hoover reviewed the past four years of his administration. The stock market had crashed seven months after his inauguration. The Great Depression had arrived eight months after that. Hoover had responded energetically to the deepening crisis with actions out of the playbook of Republican “orthodoxy”: balanced budgets, tax reduction, protectionism, and community relief based on volunteerism. As the Depression deepened, he had resorted to policies that pushed the limits of his own philosophy: fiscal deficits, debt financing, government investment in private enterprises, debt moratoriums, and public works spending to promote employment. None of these actions had halted the worsening economic news. In 1930, a landslide of public anger delivered a Democratic Party majority to the House of Representatives. Then in November 1932, New York governor Franklin D. Roosevelt (FDR) defeated Hoover in the presidential election.

Now, in the interregnum before the transfer of office on March 4, 1933, Hoover sought FDR's alignment on policies and actions to address the crisis. In February 1933, banking panics were spreading across the country. A “run” against the US dollar was growing, as foreign holders of the currency sought to exchange it for other currencies or to convert it to gold at the US Treasury. Unemployment was rising. Hoover had met with FDR on November 11, 1932, and on January 30, 1933, and had received only vague indications that the president-elect understood the issues. Subsequently, FDR and his advisers seemed to evade any commitments to future policies. What should Hoover do or say to tackle the problems in the time he had remaining in office? And as the transfer of power approached, what challenges should be the top priorities? Finally, what advice should he give to the new president?

Keywords: Great Depression, Herbert Hoover, Franklin D. Roosevelt, stock market crash, balanced budget, tax reduction, protectionism, Republican, Democrat, fiscal deficit, debt financing, public works, bank run, panic, demand shock, supply shock, Smoot-Hawley Tariff, international trade, Federal Reserve, Fed, Europe, Versailles Treaty, World War I, gold exchange standard, isolationism, reparations, exchange rates, fiscal austerity, Reconstruction Finance Corporation, Glass-Steagall Act of 1932, inflation, deflation, sticky wages, labor hoarding, labor conflicts, banking crisis, currency instability, monetary policy

Suggested Citation

Bruner, Robert F., 1930–1933: The Great Depression and the End of 'Orthodoxy' (A). Darden Case No. UVA-F-1904. Available at SSRN: https://ssrn.com/abstract=3475939

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

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Charlottesville, VA 22906-6550
United States
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HOME PAGE: http://faculty.darden.edu/brunerb/

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