In-depth analysis on Credit Writedowns Pro.

Herbert Hoover: 1932 Special Message to Congress Proposing Balanced Budget

In his State of the Union in December of 1931, US President Hoover maintained that the problems in Europe were to blame for America’s continued depression. He felt that America’s “matchless strength and resources, would have enabled us to recover” were it not for the events in Europe following Credit Anstalt in 1931:

Although some of the causes of our depression are due to speculation, inflation of securities and real estate, unsound foreign investments, and mismanagement of financial institutions, yet our self-contained national economy, with its matchless strength and resources, would have enabled us to recover long since but for the continued dislocations, shocks, and setbacks from abroad.

Despite the economic problems, it is clear that President Hoover believed fervently in budget discipline. He felt that the government’s budget still needed to be balanced and implored Congress here in April 1932 to work with him in order to cut spending to meet this objective. As the executive, he wrote that he needed greater authority to make additional cuts:

A clear indication that the limit of executive authority to bring about economies has about been reached, is shown by the fact that the total expenditures estimated in the budget of $4,112,000,000 (including Post Office deficit after deduction of receipts) presented to the Congress, except for increased payments to veterans and expenditure on construction work in aid of employment, was the lowest in over five years.

Congress did not establish the joint committee that the President proposed. The deficit went from 0.6% in fiscal year 1931 to 4.0% of GDP in fiscal year 1932 as receipts plummeted to $1.9 billion from $3.1 billion and outlays spiked to $4.7 billion from $3.6 billion as the depression deepened.

To the Senate and House of Representatives:

I have in various messages to the Congress over the past three years referred to the necessity of organized effort to effect far-reaching reduction of governmental expenditures.

To balance the budget for the year beginning July 1st next, the Revenue Bill passed by the House of Representatives on April 1st necessitates that there shall be a further reduction of expenditures for the next year of about $200,000,000 in addition to the reduction of $369,000,000 in expenditures already made in the budget recommendations which I transmitted to the Congress on December 9th.

It is essential in the interest of the taxpayer and the country that it should be done. It is my belief that still more drastic economy than this additional $200,000,000 can be accomplished. Such a sum can only be obtained, however, by a definite national legislative program of economy which will authorize the consolidation of governmental bureaus and independent establishments; and beyond this, which will permit the removal of long established methods which lead to waste; the elimination of the less necessary functions, and the suspension of activities and commitments of the government not essential to the public interest in these times.

[…]

Therefore, I recommend to the Congress that in order to secure this unity of effort and prompt action, and thus insure the relief of the taxpayer and a balanced budget, at the same time protecting vital service of the government, that representatives be delegated by the two Houses, who, together with representatives of the Executive, should be authorized to frame for action by the present Congress a complete national program of economy and to recommend the legislation necessary to make it possible and effective. Such a course would expedite rather than delay the passage of appropriations bills.

I am convinced that only by such unified, non-partisan effort, and by a willingness on the part of all to share the difficulties and problems of this essential task can we attain the success so manifestly necessary in public interest.

HERBERT HOOVER

The White House,

April 4, 1932.

Sources:

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

3 Comments

  1. Spending was $3.0 billion in 1929, and $4.6 billion in 1932 – over a 50% increase in 3 years. There was a slight 1% decrease in spending for 1933, but this was minor in comparison to the massive increase over the prior period. Hoover giving a speech doesn’t change what actually happened. (see p. 21) http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf

    You do mention this fact (or at least, the massive increase in spending from 1931-1932), but bizarrely refer to the increase in “revenue”, even though you are citing spending numbers.

  2. ron says:

    You mean politicians words and actions didn’t always coincide in the 1930s either? Next you’ll dig up a speech from Hoover saying bold action and massive spending increases are needed. But, then maybe flip-floping is a new phenomenon.

  3. Blissex says:

    I have reread (one of many times) J. K. Galbraith’s “The Great Crash 1929″ and it is such a timeless classic (Chapter 4 title is “In Goldman Sachs we trust” ;->).

    Sometimes I feel that it could be reprinted today with a few names and dates changed…

    For example, one of the more amusing details is that FDR campaigned on an austerity platform (page 200):

    «In November 1929, Mr Hoover announced a cut in taxes; in the great no-business conferences that followed he asked business firms to keep up their capital investment and to maintain wages. Both of these measures were on the right side of increasing spendable income, though unfortunately they were largely without effect. The tax reductions were negligible except in the higher tax brackets; businessmen who promised to to maintain investment and wages, in accordance with a well-understood convention, considered the promise binding only for the period in which it was financially disadvantageous to do so. As a result investment outlays and wages were not reduced until circumstances would have in any brought their reduction.

    Still, the effort was in the right direction. Thereafter policy was almost entirely on the side of making things worse. Asked how the government could best advance recovery, the sound and responsible adviser urged that the budget be balanced. Both parties agreed on this. For Republicans the balanced budget was, as ever, high doctrine. But the Democratic platform of 1932, with an explicitness which politicians rarely advise, also called for a “federal budget annually balanced on the basis of accurate executive estimates within revenues …”.

    A commitment to a balanced budget is always comprehensive. It then meant that there could be no increase in government outlays to expand purchasing power and relieve distress. It means that there could be no further tax reduction. But taken literally it meant much more. From 1930 the budget was far out of balance, and balance, therefore, meant an increase in taxes, a reduction in spending, or both. The Democratic platform in 1932 called for an “immediate and drastic reduction in governmental expenditures” to accomplish at least a twenty-five percent decrease in the cost of government.

    The balanced budget was not a subject of thought. Nor was it, as often asserted, a precise matter of faith. Rather it was a formula. For centuries avoidance of borrowing had protected people from slovenly or reckless public housekeeping. Slovenly or reckless keepers of the public purse had often composed complicated arguments to show why balance of income and outlay was not a mark of virtue. Experience had shown that however convenient this belief might seem in the short run, discomfort or disaster followed in the long run. Those simple precepts of a simple world did not hold amid the growing complexities of the early thirties. Mass unemployment in particular had altered the rules. Events had played a very bad trick on people, but almost no one tried to think out the problem anew.

    The balanced budget was not the only strait jacket on policy. There was also the bogy of “going off” the gold standard and, most surprisingly, of risking inflation. Until 1932 the United States added formidably to is gold reserves, and instead of inflation the country was experiencing the most violent deflation in the nation’s history. Yet every sober advisor saw danger here, including the danger of runaway price increases. Americans, though in years now well in the past, had shown a penchant for tinkering with the money supply and enjoying the brief but heady joys of a boom in prices. In 1931 or 1932, the danger or even the feasibility of such a boom was nil. The advisers and counsellors were not, however, analysing the danger or even the possibility. They were serving only as the custodians of bad memories.

    The fear of inflation reinforced the demand for the balanced budget. It also limited efforts to make interest rates low, credit plentiful and borrowing as easy as possible under the circumstances. Devaluation of the dollar was, of course, flatly ruled out. This directly violated the gold standard rules. At best, in such depression times, monetary policy is a feeble reed on which to lean. The current economic cliches did not allow even the use of that frail weapon. And again, these attitudes were above party. Though himself singularly open minded, Roosevelt was careful not to offend or disturb his followers. In his speech in Brooklyn towards the close of the 1931 campaign, he said:

    “The democratic platform specifically declares `We advocate a sound currency to be preserved at all hazards.’ That is plain English. In discussing this platform on 30 July, I said ‘Sound money is an international necessity, not a domestic consideration for one nation alone.’ Far up in the Northwest, at Butte, I repeated the pledge … In Seattle I reaffirmed my attitude …”

    The following February, Mr Hoover set forth his view, as often before, in a famous letter to the President-elect:

    “It would steady the country greatly if there could be prompt assurance that there will be no tampering or inflation of the currency; that the budget will be unquestionably balanced even if further taxation is necessary; that the government credit will be maintained by refusal to exhaust in the issue of securities.”

    The rejection of both fiscal (tax and expenditure) and monetary policy amounted precisely to a rejection of all affirmative government economic policy. The economic advisors of the day had both the unanimity and the authority to force the leaders of both parties to disavow all the available steps to check deflation and depression. In its own way this was a marked achievement — a triumph of dogma over thought. The consequences were profound.»

    One of the few updates is that it is no longer true that «For Republicans the balanced budget was, as ever, high doctrine.» because Republicans now have the far more expedient doctrine that deficits don’t matter when the President is Republican and then will cuts taxes, but they matter a lot when the President is Democrat and then should cut spending.