The farm sector of the American economy had struggled in the 1920s, but overall by 1928, the United States had enjoyed eight years of unprecedented prosperity under Republican Presidents Harding and Coolidge. As the 1928 presidential race drew to a close, the Republican candidate, former Secretary of Commerce Herbert Hoover, outlined the Republicans’ governing philosophy, which he credited with producing the prosperity. Seven months after Hoover took office, in October 1929, the stock market crashed. After two weeks, it recovered somewhat, but then began a long-term decline, as the American economy fell into what became known as the Great Depression.

The fall in the stock market and the resulting loss of wealth was not the sole cause of the Depression. Economists still debate what broader effect the stock market crash had on the American economy and why the Great Depression was so severe and so prolonged. Two factors that postdate the stock market crash and are part of the current debate – the decrease in foreign trade and the failure of the banking system – were noted by contemporaries. However, contemporaries tended to agree that the US government should ensure the soundness of the financial system by setting its own financial house in order. This meant reducing its debt by curtailing its expenditures and even raising taxes, if necessary. Today, most economists would consider such measures counterproductive during a depression. High tariffs restricting trade did not encourage recovery, and reductions in government spending removed an economic stimulus that might have helped. (Economic orthodoxy began to change with the publication of John Maynard Keynes’ The General Theory of Employment, Interest and Money, in 1936, which called for governments to increase spending and deficits during a downturn.)

Hoover responded to the economic difficulties according to the principles he had articulated in 1928. The American system was sound, he thought, and would recover with only limited assistance from the government. As the economic situation worsened, however, Hoover did propose a series of measures to deal with the crisis, including the establishment of the Reconstruction Finance Corporation (RFC), a government entity that lent money to state and local governments, banks, and other businesses.

Franklin Delano Roosevelt, the leading Democratic candidate for President in 1932, argued that the American system as championed by Hoover was not sound and needed to be changed.

In a series of speeches in 1932 (The Forgotten Man, his Acceptance Speech at the Democratic Convention, and “Commonwealth Club Address”), Roosevelt explained why he thought the Depression had occurred and what had to be done to restore the country to economic health. This was the “New Deal” that Roosevelt offered the American people.

In his final weeks in the Oval Office, as the economic crisis reached its most severe stage, Hoover argued that President-elect Roosevelt had made the situation worse by refusing to commit himself to balancing the budget and maintaining a sound currency. Hoover first offered his account verbally to one of his closest political allies, Senator Simeon Fess of Ohio. At Fess’s request, Hoover put his remarks in writing in a letter he sent the Senator.

National Archives Catalog, Simeon D. Fess Papers, 1933.

. . . Today we are on the verge of financial panic and chaos. Fear for the policies of the new administration has gripped the country. People do not await events, they act. Hoarding of currency, and of gold, has risen to a point never before known; banks are suspending [their activities] not only in isolated instances, but in one case an entire state. Prices have fallen since last autumn below the levels which debtors and creditors can meet. Men over large areas are unable or are refusing to pay their debts. Hundreds of millions of orders placed before [the] election have been cancelled. Unemployment is increasing, there are evidences of the flight of capital from the United States to foreign countries, men have abandoned all sense of new enterprise and are striving to put their affairs in defense against disaster.

Some days before [the] election the whole economic machine began to hesitate from the upward movement of last summer and fall. For some time after [the] election it continued to hesitate but hoped for the best. As time has gone on, however, every development has stirred the fear and apprehension of the people. They have begun to realize what the abandonment of a successful program of this administration which was bringing rapid recovery last summer and fall now means and they are alarmed at possible new deal policies indicated by the current events. It is this fear that now dominates the national situation. It is not lack of resources, currency or credit.

The incidents which have produced this fear are clear. There was a delay by the President-elect of over two months in willingness to cooperate with us to bring about order from confusion in our foreign economic relations. There have been a multitude of speeches, bills, and statements of democratic members of Congress and others proposing inflation or tinkering with the currency. . . . Such proposals as the bills to assume Federal responsibility for billions of mortgages, loans to municipalities for public works, the Tennessee improvement and Muscle Shoals, are all of this order.[1] The proposals of Speaker Garner[2] that a constitutional government should be abandoned because the Congress, in which there will be an overwhelming majority, is unable to face reduction of expenses, has started a chatter of dictatorship. The President-elect has done nothing publicly to disavow any of these proposals.

The Democratic House has defeated a measure to increase tariffs so as to prevent invasion of goods from depreciated currency countries, thus estopping increased unemployment from this source. There have been interminable delays and threatened defeat of the Glass Banking Bill,3 and the Bankruptcy bill.4

[Here Hoover recounts events of the prior 18 months, demarking five distinct periods that, he claims, oscillated between economic decline and recovery.]

The President-elect is the only man who has the power to give assurances which will stabilize [the] public mind as he alone can execute them. Those assurances should have been given before now but must be given at once if the situation is to be greatly helped. It would allay some fear and panic whereas delay will make the situation more acute.

The present administration is devoting its days and nights to put out the fires or to localize them. I have scrupulously refrained from criticism which is well merited, but have instead been giving repeated assurances to the country of our desire to cooperate and help the new administration.

What is needed, if the country is not to drift into great grief, is the immediate and emphatic restoration of confidence in the future. The resources of the country are incalculable, the available credit is ample but lenders will not lend, and men will not borrow unless they have confidence. Instead they are withdrawing their resources and their energies. The courage and enterprise of the people still exist and only await release from fears and apprehension.

The day will come when the Democratic Party will endeavor to place the responsibility for the events of this Fifth period on the Republican Party. When that day comes I hope you will invite the attention of the American people to the actual truth.

Study Questions

A. According to President Herbert Hoover, what were the major causes of the Great Depression, and what were the best ways to respond? How did Franklin D. Roosevelt’s views on the causes and solutions to the economic crisis differ from Hoover’s? How did the American system championed by Hoover differ from the New Deal offered by Roosevelt? How does “rugged individualism” differ from concern for “the forgotten man”? What were the different responses they offered to the “boom and bust” economic cycle? Was Roosevelt right to argue that he was following a bottom-up approach, while Hoover was following a top-down approach? What did Roosevelt mean when he said that the age of enlightened administration had come? Both Hoover and Roosevelt spoke of equality of opportunity. Did they mean the same thing by this phrase? How did each think such equality was best achieved?

B. How do the powers of the federal government implied in the New Deal compare to those Justice David Brewer described when delivering his opinion in In re Debs?

C. How might we evaluate these documents in light of the questions about moral virtue and market behavior raised in the colonial period? What role, if any, do the authors in this chapter see for virtue in the economy? What are the consequences of neglecting to consider virtue in this context?


  1. During World War I the federal government had constructed a dam and hydroelectric facility on the Tennessee River at Muscle Shoals, AL, to provide power for a munitions plant. After the war, Republicans like Hoover favored selling the facility to private industry, while Democrats and progressive Republicans argued the government should continue operating the plant to provide electricity to the rural South.
  2. John N. Garner (D-TX), the Vice-President-elect
  3. Hoover refers probably to the legislation that became the Banking Bill of 1933. This bill prohibited banks from engaging in both commercial and investment banking and established a system of insurance for bank deposits. The bill passed June 16, 1933.
  4. Hoover’s reference is not clear, but may be to the Hastings-Michener Bill of 1932. See, Vincent L. Leibel, “The Chandler Act: Its Effect Upon the Law of Bankruptcy,” Fordham Law Review 9, 3 (1940), 380–409.