Overview
This lecture reviews Herbert Hoover's economic policies during the early years of the Great Depression, focusing on his shift between laissez-faire and interventionist approaches, and the effects of his labor-related programs.
Hoover's Presidency and Initial Response
- Herbert Hoover was president from 1929 to 1933, following Republican Calvin Coolidge.
- Hoover initially followed classical economic theory, believing markets self-correct and the economy would recover naturally.
- The stock market crashed in October 1929 ("Black Tuesday"), causing a severe economic downturn.
Hoover's Economic Policies
- Initially advocated for laissez-faire policies, expecting a typical recession recovery.
- Faced with worsening conditions, Hoover shifted towards government intervention and regulation.
- Later in his term, reverted to a more hands-off approach, returning to classical theory.
Volunteerism and Wage Policies
- Hoover promoted volunteerism by urging business owners to raise worker wages to stimulate demand.
- Deflation, or falling prices, caused real wages (purchasing power) to rise even if nominal wages stayed fixed.
- Formula: Real wage = Nominal wage / Price level.
- Rising real labor costs made firms less willing or able to voluntarily increase wages, making the policy ineffective.
Labor Unions and the Norris-LaGuardia Act
- Hoover supported labor unions through the Norris-LaGuardia Act (1932), which banned "yellow-dog contracts" that prevented workers from unionizing.
- The act also stopped courts from issuing injunctions against peaceful strikes and protests, increasing union power.
- Stronger unions led to higher wages for some but also higher unemployment, as firms hired fewer workers due to increased costs.
Economic Impact and Aggregate Supply
- Increased union power reduced employment, shifting short-run aggregate supply leftward, decreasing output and raising prices.
- Aggregate demand was unaffected because overall income and money supply did not change.
- Output decline mitigated deflation but increased unemployment, worsening the Depression.
Key Terms & Definitions
- Laissez-faire — economic policy of minimal government intervention.
- Classical economic theory — belief that markets self-regulate via flexible prices and wages.
- Black Tuesday — the 1929 stock market crash marking the Depression's start.
- Volunteerism — policy of encouraging voluntary wage increases.
- Nominal wage — wage measured in current dollars, not adjusted for inflation.
- Real wage — wage adjusted for inflation (Nominal wage / Price level).
- Deflation — general decrease in prices.
- Yellow-dog contract — employment agreement prohibiting union membership.
- Norris-LaGuardia Act — 1932 law strengthening labor unions by banning yellow-dog contracts and limiting court injunctions.
Action Items / Next Steps
- Review chapter ten, especially sections on Hoover's economic policies and the Norris-LaGuardia Act.
- Revisit appendix ten for aggregate supply and demand models.
- Prepare to discuss effects of labor policy on the economy in the next class.