Wage Movements During Two Depressions
In the thread discussing today’s Mises Daily, we are getting into a standard fight over the idea that Herbert Hoover might have had something to do with unemployment (and not because he was a dogmatic laissez-faire kind of guy). Blackadder made the point well:
Clearly you have very different outcomes from the 1921 and 1929 recessions, and asking what the difference was that caused the different outcomes is an important question. However, saying that the difference is explain by the fact that Hoover held a conference with business leaders and urged them to not cut wages doesn’t hold water. In any other context libertarians would find the idea that government jawboning could have such a huge effect laughable. The only reason libertarians take the idea seriously w/r/t Hoover, I submit, is that they need some explanation for how government prevented recovery from 1929-32, and this is the best they can come up with.
OK, so things are a lot better for me than Blackadder is painting it. For what it’s worth, I too was skeptical about saying that Herbert Hoover held up wages through mere jawboning. But what pushed me over the edge was finding this type of information (quoting from my book on the Depression):
[A]fter the stock market crash Hoover quickly convened a series of White House conferences with leading financiers and businessmen…He won their agreement to aim for the maintenance of wages, positions, and investment spending. If this proved impossible, the business leaders would cut wages more slowly than product prices…The business leaders not only agreed–Henry Ford even promised to raise wages–but also appointed their representatives to a special advisory committee that would coordinate the government-industry response to the crisis. [Murphy p. 39]
OK so that’s part of my explanation; this wasn’t mere jawboning on the radio, Hoover had names. If he wanted to reward you for going along, or punish you for not, he knew who you were. I have seen some theories as to what the carrots and sticks may have been, but nothing that totally convinced me. Nonetheless, the idea that the president could lean on major businesses doesn’t seem completely ludicrous on its face, as Blackadder suggests.
In any event, Blackadder is misleading when he implies that we are merely starting from the observation that the economy stalled a lot longer in the 1930s than in the early 1920s. No, we know specifically that wages behaved very differently. Quoting Vedder and Galloway (from my book):
While the initial increase in unemployment can be largely explained by the productivity shock, the very sharp rise in unemployment in 1931 was not related to further declines in output per worker. Productivity per worker changed little, actually rising somewhat…Money wages fell, but rather anemically. Whereas in the 1920-1922 depression a roughly 20 percent fall in money wages was observed in one year, the 1931 decline was less than 3 percent. By contrast, prices fell more substantially, 8.8 percent, so real wages actually rose significantly in 1931, and were higher in that year than in 1929, despite lower output per worker. The 1931 price [declines], accompanied by a failure of money wages to adjust…seemed to be the root cause of the rise in unemployment to over 15 percent in 1931. [Vedder and Galloway quoted in Murphy pp. 40-41]
So clearly something really drastic changed in the American business landscape in a decade. For some reason, money-wages became much more rigid downward. I don’t think it’s crazy to think that the president’s quite organized campaign–which was praised by a union editorial in January 1930, as I quote in my book too–had something to do with this.
My understanding was, it was more than just Hoover.
As I remember, Rothbard explains in America’s Great Depression that the idea had suddenly taken hold that prices ‘should be stable.’ Not just by eggheads trying to manipulate the economy, but as a sort of cultural shift from emphasizing stable money to stable prices. That was part of what allowed the FED to be established (when central banks had to that point been roundly rejected by the public).
People felt that if they could just put things back to the way they were in 1929, everything would be okay. Part of that was keeping prices where they were — which of course guaranteed that businesses couldn’t make a profit, so employment and the economy stagnated. The Hoover administration went to great pains — far beyond jawboning — to try to prop up prices across the board. (I’m thinking of the agricultural subsidies, etc.)
Look, when FDR became president he did all sorts of horrible things to the economy, imposes wage and price controls, empowered unions, prosecuted leading business figures (as well as the former Treasury Secretary), confiscated all private gold holdings, etc. And yet, unemployment actually went down significantly during the 1932-36 period. Are we supposed to believe that Hoover’s implied threats harmed the economy much more than when FDR actually carried them out?
Isn’t economy really more vulnerable at the time of a bubble bursting than 4 years after that event. Doesn’t economies bottom out and grow, however slowly, so long as communism isn’t embraced in that time frame? Couldn’t a case be made that economy would have come roaring back but for the constant meddling by FDR? The fact that FDR was continuously meddling gives me the impression that the recovery wasn’t very robust at all.
Doesn’t economies bottom out and grow, however slowly, so long as communism isn’t embraced in that time frame?
It shouldn’t take four years for the economy to bottom out. Bob recognizes this, which is why he points to things like Hoover’s wage pleading as preventing recovery and making things worse.
Couldn’t a case be made that economy would have come roaring back but for the constant meddling by FDR?
I think an excellent case can be made for this. It doesn’t explain why there was no recovery prior to 1932, however.
“It shouldn’t take four years for the economy to bottom out.”
I don’t agree with everything Bob has to say here, but give me a break. Like you have any idea how long it should take an economy to bottom out.
Like you have any idea how long it should take an economy to bottom out.
Bob agrees with me that it shouldn’t have taken four years for the economy to bottom out (hence his invocation of the 1921 recession, where you had recovery in about two years).
OK, fair enough.
C’mon Blackadder, you gotta work with me here. The “cure” that FDR implemented was to go off gold and inflate; CPI turned on a dime when he came in. (Hope this link works.)
That’s why so many people think gold is bad, and our solution now is to print print print. My point of course is that we didn’t need this back in 1920-1921. For some reason, wages were a lot more flexible back then.
Incidentally, I’m not making up stuff on the fly. All of my position here was in the Depression book.
BTW, Bob, I don’t trust this data that comes from the Fed. Christina Romer had a couple of papers on why the pre-WWI shows more pronounced volatility than there really was. If her work is to be believed, then recession have been slighly longer and deeper after WWII than the ones before WWI.
I sometimes use measuringworth.org. I am not sure how reliable their data is, but it seems to rectify some these problems with older data. Fed shows the entire 1870s as a long depression, when was a period of booming growth.
These are the papers I am talking about. I picked it up from a Cato Paper by Selgin & White.
1986a. “Is the Stabilization of the Postwar Economy a Figmentof the Data?”American Economic Review76 (June): 314-34.
__________. 1986b. ―Spurious Volatility in Historical Unemployment Data.‖Journalof Political Economy94(1) (February): 1-37.
__________. 1989.―The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908.‖Journal of Political Economy97: 1-37.
__________ . 1994. ―Remeasuring Business Cycles.‖Journal of Economic History54 (3)(September): 573-609.
__________. 1999.―Changes in Business Cycles: Evidence and Explanations.‖Journal of Economic Perspectives13(2) (Spring): 23-44.
__________. 2009. ―New Estimates of Prewar Gross National Product and Unemployment.‖Journal of Economic History46(2) (June): 341-52.
The “cure” that FDR implemented was to go off gold and inflate; CPI turned on a dime when he came in.
I thought you believed this argument was bogus, and that FDR’s gold seizure may actually have impeded recovery. Is that not correct?
Wow Blackadder, this is really taking a lot of time to spell out a basic argument. (And to repeat, this is what I’ve been saying all along; try this article from 2009.)
If the government/unions keep wages inflexible, and on top of that you have sharply falling prices, then yes you are going to get high unemployment, because you are effectively making labor more expensive right when it is becoming less productive.
Now in that environment, if someone starts debasing the currency and raising prices, this can help the unemployment problem. You are effectively lowering the real wage, making labor cheaper.
So do I “support debasement”? Of course not, since unions eventually react and because currency debasement carries all sorts of its own problems. A better solution would be to address the things propping up nominal wages.
Bob,
Fair enough. I apologize for any dickishness I exhibited in this thread.
Nah, it never rose to the level of d*ckishness, more like time-consuming incredulity. but thanks.
A propos of jawboning, here is a bit from Robert Samuelson’s book The Great Inflation. The context is that in the early 1960s the government issued “guideposts” for wage and price increases, trying to limit the amount employers would raise wages or prices as a means of combatting inflation. Enter LBJ:
President Johnson strove to enforce the guidelines. His delusion was that he could talk businesses and unions out of inflationary behavior so that the problem would just go away. “Jawboning” was the word used at the time, and Johnson was zealous at it. In 1965, the steelworkers and major steel companies – then a dominant industry – were close to an agreement that would have breached the guidposts. A flagrant violation would have rendered the guideposts meaningless. Johnson summoned the negotiators to Washington, provided his own mediators and insisted on wage increases within the guideposts and no price increases. When negotiators capitulated, he announced his success live on all three major networks (ABC, CBS, and NBC). Later, when Bethlehem Steel raised structural steel prices $5 a ton, Johnson attacked its executives as unpatriotic; they backed down. The episode “confirmed the belief in our minds and Johnson’s that the President could get anyone to agree and that we could exert enormous influence over labor negotiations in the future,:” wrote his aide Joseph Califano. The confidence was misplaced. Even Johnson could not single-handedly persuade and bully the entire economy the way he had the U.S. Senate while majority leader.
When it came to intimidating people, LBJ makes Hoover look like a piker. If he couldn’t stop normal market pressures from operating, the idea that the geeky technocrat Herbert Hoover could do so is absurd.
Blackadder, I have always thought that the federal government’s price controls in energy markets and airlines affected those industries quite significantly. But I’m afraid to bring up these views, since surely LBJ was more of a bad*ss than the peanut farmer Jimmy Carter. I’m not sure my self-esteem can withstand you calling my views “absurd” twice in the same night.
So…do you think the Nobel Peace Prize winner (though not at the time) Jimmy Carter could have influenced the real economy, via price rigidities? How about when gas lines developed in Nashville a few years ago, when the DA set up a hotline for people to call in and complain about “price gouging” by gas stations after a storm knocked out refineries? To judge this theory, do you need to google the DA, to make sure he is at least as tough as LBJ?
LBJ wore sun glasses to protect the sun from his eyes.
Bob,
The price control and price gouging cases aren’t instances of jawboning. There were actual laws on the books making the actions criminal.
OK so we’ve established that the federal government can influence prices and wages, and even lead to massive gluts in various markets. It would seem to me the next step would be to ask, what tools the Hoover Administration may have used in this respect. I don’t think it’s enough to cite Hoover’s temperament.
Blackadder,
This may be of interest to you:
http://www.econ.ucla.edu/people/papers/Ohanian/Ohanian499.pdf
“The 1931 price [declines], accompanied by a failure of money wages to adjust…seemed to be the root cause of the rise in unemployment to over 15 percent in 1931.”
The error here is assuming that, if wages and prices were flexible, you would have no unemployment: but anytime money can be used as a store of value, where money can be diverted to financial asset markets and where business expectations are subjective, Say’s law does not work. Even if wages and prices were perfectly flexible, you would still have involuntary unemployment and failures of aggregate demand.
Moreover, the 1929-1933 contraction was of an different nature to the recession of 1920-1921.
(1) there was no large collapsing asset bubble in 1920/1921 funded by excessive private debt; in 1929, there was, which set up the economy for (2)
(2) The economy was gripped by debt deflation in 1929-1933, with highly overindebted private sector;
(3) There were no serious financial crises and mass banking collapses in 1920-1921, as in 1929-1933;
No analysis of 1929-1933 that ignores the financial collapse and dynamics of debt deflation is even remotedly serious.
And there is yet another absurd contradiction here. I bet you and Austrians here claim that the recession of 1920-1921 ended reasonably quickly with a recovery. But the Fed lowered interest rates in 1921-1922: according to your own Austrian trade cycle theory, this “recovery” was just another unsustainble boom, distorting capital structure.
On debt deflation:
Fisher, I. 1933. “The Debt-Deflation Theory of Great Depressions,” Econometrica 1.4: 337–357.
Minsky, H. P. 2008 [1975]. John Maynard Keynes, McGraw-Hill, New York and London.
“And there is yet another absurd contradiction here. I bet you and Austrians here claim that the recession of 1920-1921 ended reasonably quickly with a recovery. But the Fed lowered interest rates in 1921-1922: according to your own Austrian trade cycle theory, this “recovery” was just another unsustainble boom, distorting capital structure.”
You might want to check out Murray Rothbard’s book Americas Great Depression.
Inflation of the Money Supply, 1921-1929
“It is generally acknowledged that the great boom of the 1920s began around July, 1921, after a year or more of sharp recession, and ended about July, 1929. Production and business activity began to decline in July, 1929, although the famous stock market crash came in October of that year. Table 1 depicts the total money supply of the country, beginning with $45.3 billion on June 30, 1921 and reckoning the total, along with its major constituents, roughly semiannually thereafter.[8] Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922-1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred precisely when we would expect—in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. To generate the business cycle, inflation must take place via loans to business, and the 1920s fit the specifications. No expansion took place in currency in circulation, which totaled $3.68 billion at the beginning, and $3.64 billion at the end, of the period. The entire monetary expansion took place in money-substitutes, which are products of credit expansion. Only a negligible amount of this expansion resulted from purchases of government securities: the vast bulk represented private loans and investments. (An “investment” in a corporate security is, economically, just as much a loan to business as the more short-term credits labeled “loans” in bank statements.) U.S. government securities held by banks rose from $4.33 billion to $5.50 billion over the period, while total government securities held by life insurance companies actually fell from $1.39 to $1.36 billion. The loans of savings-and-loan associations are almost all in private real estate, and not in government obligations. Thus, only $1 billion of the new money was not cycle-generating, and represented investments in government securities; almost all of this negligible increase occurred in the early years, 1921-1923. “
So yes, after the 1920-1921 depression ended the Fed started up the printing presses and set in motion another unsustainable boom that would come crashing down in 1929. There is no contradiction with that analysis.
Yes, there is: Austrians are forever claiming that 1920-1921 “proves” that recessions end quickly without government intervention.
In fact, there was major government intervention in 1921: monetary intervention via the Fed.
If you believe that 1921 was only a false “recovery” caused by lowering of interest rates, then this recovery doesn’t support Austrian theory at all.
In fact, there was major government intervention in 1921: monetary intervention via the Fed.
A tool of which has a lagged economic effect.
For example, the Fed in 2008 decreased rates to 0%, and the effects of it weren’t felt until at least a year later.
You are contradicting basic economic facts in order to force feed the data to fit your worldview. You can’t do that. No economist believes that lowering the central bank’s discount rate has such an immediate economic effect that you are claiming is the case in 1921.
No analysis of 1929-1933 that ignores the financial collapse and dynamics of debt deflation is even remotedly serious.
Wow! That’s very open minded.
But the Fed lowered interest rates in 1921-1922: according to your own Austrian trade cycle theory, this “recovery” was just another unsustainble boom, distorting capital structure.
I will agree with you on this.
LK, the existence of a huge debt overhang doesn’t explain the nominal rigidities in 1929-1931 compared to 1920-1921. If the debt deflation stuff is right, then you could explain why the economy continued to be awful, even when money-wages fell 20 percent in a year (like they did in 1920-1921).
But that’s not what we’re trying to explain. We’re trying to explain why all of a sudden, wages were a lot less flexible. The fact that people had bad balance sheets doesn’t explain that.
The error here is assuming that, if wages and prices were flexible, you would have no unemployment: but anytime money can be used as a store of value, where money can be diverted to financial asset markets and where business expectations are subjective, Say’s law does not work.
Not only does Say’s Law not say that less than full employment is an impossibility, but it is also not the case that flexible wages and prices cannot constitute a solution to unemployment.
Say’s Law, properly understood, and not the garbled misrepresentation elicited by Keynes, is just that when the economy is producing in the proper balance, meaning when producers are producing goods in the proper relative abundances, then general “overproduction” is impossible.
Prior to economics even becoming a field on its own, the average businessman had two explanations for why business was bad. It was caused by a scarcity of money, and by overproduction. Adam Smith, in The Wealth of Nations, refuted the first of these myths. Say refuted the second.
Say’s Law, in one sentence, is that purchasing power grows out of production, as long as the production proportions are consistent with marginal utility. Keynes and his followers on the other hand believed that purchasing power must be kept above production if production is to expand. So they advocate for budget deficits.
The idea that supply creates its own demand is based on the assumption that a proper equilibrium exists among the different kinds of production, and among prices of different products and services. All Keynes did when he “refuted” Say’s Law is to ignore this production proportion requirement inherent in Say’s Law. Nowhere in the GT did he even mention it. Well, when you ignore a crucial aspect of the argument you are considering, then it’s easy to refute a straw man.
Even if wages and prices were perfectly flexible, you would still have involuntary unemployment and failures of aggregate demand.
Not true. If wages and prices were perfectly flexible, then any prevailing wage rate that is too high relative to the demand and supply of labor, will create a labor surplus, and it will be to the worker’s self-interest to underbid each other until wage rates increase and unemployment decreases. Similarly, if prevailing wage rates are too low relative to the demand and supply of labor, then a labor shortage will develop, and it will be to employer’s self-interest to bid wages back up.
Moreover, the 1929-1933 contraction was of an different nature to the recession of 1920-1921.
(1) there was no large collapsing asset bubble in 1920/1921 funded by excessive private debt; in 1929, there was, which set up the economy for (2)
(2) The economy was gripped by debt deflation in 1929-1933, with highly overindebted private sector;
(3) There were no serious financial crises and mass banking collapses in 1920-1921, as in 1929-1933;
No analysis of 1929-1933 that ignores the financial collapse and dynamics of debt deflation is even remotedly serious.
If credit expansion created debt differences are a factor, then it should be able to explain the differences in initial collapse and in price and wage changes.
The more credit expansion debt the economy contains in bidding up prices and wages during the boom, then the more prices and wages should fall after the collapse. Thus, prices and wages should have been even more volatile in the downward direction after 1929 compared to 1920, since there was so much more credit expansion credit debt. But the exact opposite occurred. Wages and prices were a lot less volatile after 1929 relative to after 1920.
And there is yet another absurd contradiction here. I bet you and Austrians here claim that the recession of 1920-1921 ended reasonably quickly with a recovery. But the Fed lowered interest rates in 1921-1922: according to your own Austrian trade cycle theory, this “recovery” was just another unsustainble boom, distorting capital structure.
By the time the Fed lowered the discount rate, the economy was already well on its way to recovery. If the Fed did not lower the discount rate, then whatever remaining malinvestment existed in the system, would most likely have been liquidated.
After the Fed lowered the discount rate, and the correction was mitigated, they didn’t let up throughout the 1920s, thus blowing up a stock market bubble by the end of the decade.
“By the time the Fed lowered the discount rate, the economy was already well on its way to recovery.”
That is false.
Rate reductions began in April/May 1921:
http://www.flickr.com/photos/bob_roddis/4163830637/sizes/o/in/set-72157600951970959/
The expansion began in August 1921.
Even the real interest rate fell in July 1921, and continued to fall to the end of the year, and in the next, precisely when the recovery happened. The economy hit its trough in July 1921: the expansion began in August 1921.
That is false.
No, it is certainly true.
Rate reductions began in April/May 1921:
Rate reductions, which result in reserve increases, tend to have a 1 year to 18 month lag in their economic effects. By the time the rate reductions had an impact, the economy was already on its way to recovery. You can’t point to reductions in late 1921 and economic recovery in late 1921 and say aha, it was rate reductions. That’s post hoc ergo propter hoc.
“Rate reductions, which result in reserve increases, tend to have a 1 year to 18 month lag in their economic effects.”
In terms of what effects?
Is it seriously your opinion that when the rates were lowered from April/May 1921, with the expectation of further rate lowering, this had zero influence on business confidence ?
Your statement:
“By the time the Fed lowered the discount rate, the economy was already well on its way to recovery.”
is false. The economy was still contracting down to July 1921. Rate lowering began in April.
In terms of what effects?
In terms of the effects you are referring to.
Is it seriously your opinion that when the rates were lowered from April/May 1921, with the expectation of further rate lowering, this had zero influence on business confidence ?
I never claimed that. Decreasing the discount rate may have short term effects, but the significance of the rate declines is what takes place because of it, and what the effects of what takes place.
A decrease in the discount rate leads to more bank borrowing. But this does not necessarily lead to more bank lending right away. And then, once bank lending does start to rebound in nominal terms, it takes time for that money to circulate throughout the economy, and then, add to this the fact that it takes time for employment to rebound after profits rebound, and that is why it takes a lot longer for such central bank policies to have a meaningful set of economic effects.
is false. The economy was still contracting down to July 1921. Rate lowering began in April.
No, that statement was true. The economy had already gone through over a year of liquidating correction, and the decline was already receding by the time July 1921 rolled around.
“But that’s not what we’re trying to explain. We’re trying to explain why all of a sudden, wages were a lot less flexible.”
No doubt the corporatist mentality that had permeated some of the American business elite in the 1920s contributed to their willingness to listen to Hoover and comply with his desire not to cut wages.
You, however, miss what I am saying: even IF wages and prices had been flexible in 1929-1931, that still would not have stopped the catastrophe: no amount of wage cuts would have induced business to invest once their subjective expectations were shattered by the shocks:
(1) the collapsing asset bubble;
(2) develeraging under excessive private debt;
(3) debt deflation
(4) bankrupcy for debtors and creditors
(5) collapse in banks and the financial system
(6) an economy wide failure of aggregate demand.
Also, have you not heard of Hayek’s later mea culpa when he admitted the diasterous effects of “secondary
deflation”?
Hayek:
“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression” (Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York. p. 13).
http://socialdemocracy21stcentury.blogspot.com/2011/01/hayek-on-secondary-deflation.html
No doubt the corporatist mentality that had permeated some of the American business elite in the 1920s contributed to their willingness to listen to Hoover and comply with his desire not to cut wages.
Yeah, because prior to 1920, the government successfully eradicated individual self-interest.
even IF wages and prices had been flexible in 1929-1931, that still would not have stopped the catastrophe: no amount of wage cuts would have induced business to invest once their subjective expectations were shattered by the shocks:
You’re pretending to read people’s minds. This is a sign that your position is untenable.
You ignore the fact that prices and wage rates fell by much more after 1920 relative to 1929. Surely a more drastic decline in prices and wages should have influenced your psychology theory more than a less drastic decline.
Also, have you not heard of Hayek’s later mea culpa when he admitted the diasterous effects of “secondary
deflation”?
Hayek: “There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression.”
The ABCT is a theory of booms. Quoting Hayek’s monetary opinion on the government’s response after a collapse isn’t a “mea culpa.” No Austrian will deny that massive monetary deflation in a credit expansion infused economy will have disastrous effects, but this doesn’t mean that the logical implication is to support more inflation. It means to stop the initial inflation, which means the solution is to not inflate again.
“Surely a more drastic decline in prices and wages should have influenced your psychology theory more than a less drastic decline.”
And as I have just said: 1920-1921 was NOT like 1929-1933:
(1) in 1920-1921, deflation was expected; severe deflation was not expect in 1929-1933
(2) the private sector was not overloaded with excessive private debt in 1920 and was not hit by the type of debt deflation that happened in 1929-1933
(3) there was no mass collapse of banks and financial system
collapse in 1920-1921.
And as I have just said: 1920-1921 was NOT like 1929-1933:
Merely repeating the same statements doesn’t make your argument any more true.
You’re reaching because your position is untenable. You’re imagining being able to read people’s minds.
Moreover, I note that Barkley Rosser disputes the degree of wage flexibility in 1920-1921:
“It was indeed an odd recession, with 1920 being the year of maximum demobilization of troops from WW I putting pressure on the labor market, and with a series of inventory adjustments from the end of the war also hitting. This led to the largest one year decline in the price level in US history, somewhere between 13 and 18%, depending on one’s source. But in contrast to the story that gets handed out, there was no comparable decline in wages, according to the one source I could find, the National Industrial Conference Board. Wages rose slightly, and did so again in 1921, the worst year of the recession, when the unemployment rate peaked in July of that year. It is true that finally in 1922, wages fell by 8% before returning to rising in the following year, but the turnaround had come already in late 1921.”
http://econospeak.blogspot.com/2010/11/does-1920-21-recession-really-prove.html
But on your specific point, to be fair: yes, Hoover no doubt stopped wages in 1929/30 from falling by his efforts.
The question is this: as I have already said, some influential sections of the US business elite were already converted to the corporatist mentality that they shared with Hoover. If there had been no Hoover in the White House, would some large US corporations have maintained wages anyway in 1929/1930?
Moreover, I note that Barkley Rosser disputes the degree of wage flexibility in 1920-1921:
According to economist J.R. Vernon, “By the spring of 1920, with unemployment rates rising, labor ceased its aggressive stance and labor peace returned.” This further allowed for wages and prices to fall. He notes that deflationary expectations, which had all but disappeared after the 1929 collapse where everyone was promised stable prices, sharply increased the supply curve in 1920, when periodic deflations were more common up to that time.
Klein [1975] has offered a more broadly based theory of price expectations which fits the 1920-21 deflation very well. Klein argues that “gold standard expectations” prevailed until the 1960s, when the reality of a fiat money supply finally was perceived. With gold standard expectations people believe that large price changes in one direction will be reversed, since prices are tied to money and money is thought to be tied to gold. According to this theory, the large 1914-20 inflation, capping an inflation actually beginning in 1896, created postwar deflationary expectations, increasing the aggregate supply curve. When aggregate demand declined in 1920, the price decline was aggravated and the output decline cushioned. By contrast, when aggregate demand declined in 192933, prices had been relatively stable for six years, so that deflationary expectations were not nearly so pronounced.
By the way, I left a comment on the previous post on your paper “Multiple Interest Rates and Austrian Business Cycle Theory.”
That is a fantastic paper. I have really enjoyed reading it.
My favorite passage was when Murphy said this:
“Yes, a sudden surge in demand can drive up the actual price of cotton above its “costs of production,” but then the higher profits will lead to more cotton production, which would push the cotton price back down.”
thanks I’ll take a look.
Lord Keynes and Blackadder: I am not certain that Herbert Hoover was the primary explanation for the ostensibly more severe wage rigidities in 1929-1931 than in 1920-1921. (I say “ostensibly” since LK has quotes that contradict the figures given by Vedder and Galloway; I was just quoting them, I haven’t researched the numbers myself.)
Maybe there were a combination of things, like increased union power, a new attitude among business leaders, and Hoover’s efforts.
Bob,
In the spirit of conciliation, I took a glance at the paper Dan Hewitt linked to from the St. Louis Fed, and while I remain highly skeptical, he does appear to have a model of how Hoover’s actions could have had that magnitude of effects (and the model does not at first glance appear to have any candyland assumptions). So I withdraw the charge of absurdity.
Two thoughts to toss out there:
If busts 1920 and prior were simply bank panics, couldn’t they be fundamentally different than a Federal Reserve boom-bust? That is, a bank panic might be short, but a massive misallocation of resources by Fed machinations would take longer to recalculate and self-correct.
If Hoover was the first president to make threats towards businesses on the scale that he did, were his threats considered more credible? After business leaders got used to it the bully pulpit lost its effectiveness, thus FDR and LBJ causing less damage. Does Obama gain any credible threat effectiveness because he uses socialistic language and not just left-wing populist language?