On Depressions

Looking back on his response to the Depression as President, Herbert Hoover explained in his “Memoirs” the sharp conflict that persisted inside the Administration between himself and Andrew Mellon, “First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that governments must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people’…At great length, Mr. Mellon recounted to me his recollections of the great depression of the seventies which followed the Civil War…He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received word that the orders for steel were pouring toward the closed furnaces; by the time he got back, confidence was growing on every hand; suddenly the panic had ended, and in twelve months the whole system was again working at full speed. I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago…But he shook his head with the observation that human nature had not changed in sixty years” (pp.30-31). Indeed, eighty years has not changed that nature.

This illustrates not only the divergent outlooks on the same problem but also shows how little former President Hoover understood what had taken place and why just over twenty years before. Mr. Mellon, nineteen years his senior, had learned from a very young age what it meant to build a business from nothing. He also knew the cost of making poor decisions. He had seen the pervasive suffering of what up to that time was called the “great depression” of the 1870s. He had learned from human nature. Similarly, Mr. Coolidge, who was seventeen years younger than Mellon, was a keen student of people. He observed the benefits of allowing bad economic decisions to work themselves out on their own and the exponential increase of suffering that results when government prevents that natural corrective. He, like Mellon, understood that the complexity of the market does not change the nature of people. The nature of people does not change. This stark difference in approach between Hoover and that of Mellon and Coolidge turned what was an “ordinary boom-slump” into something of unprecedented scope and duration because of repeated efforts to stop, suspend or slow down, through legislation and fiscal policy, the market’s natural ability to heal. Of course, good intentions were behind it all. The leadership of the 1930s was not trying to destroy the economy. But destruction and prolonged suffering did result. By trying to administer corrections through government, they unwittingly ushered in the very trouble they thought was being minimized. In terms with which Mellon would firmly agree, former President Coolidge would point back to something obvious lost in the flurry of calls to “do something” and “save the markets from themselves,” when he wrote, “The government has never shown much aptitude for real business. The Congress will not permit it to be conducted by a competent executive, but constantly intervenes. The most free, progressive and satisfactory method ever devised for the equitable distribution of property is to permit the people to care for themselves by conducting their own business. They have more wisdom than any government” (January 5, 1931).

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