LAISSEZ-FAIRE
Laissez-faire, literally "leave alone," constituted the core doctrine of classical economics that there should be minimal government intervention in economic affairs. According to this theory, an economy operating under a system of free competition will tend to produce at maximum capacity with the result that labor and other resources of production will be fully utilized. Its adherents also contended that recession was a temporary, self-correcting situation. They reasoned that when unemployment rose, wages and prices fell, with the consequence that the real supply of money in the economy grew, which in turn would eventually generate economic expansion.
The political corollary of laissez-faire held that the best government was the one that governed
least. This view enjoyed its heyday during the industrial revolution of the late nineteenth century (though it did not preclude protective tariffs). Its last hurrah in the 1920s reflected the view that government had grown too large as a result of progressive regulatory expansion and wartime economic controls. Moreover, big business—once the progressives' whipping boy—had regained popular esteem through its war production success. Getting government off the back of business therefore became a primary goal of the Republican administrations of Warren Harding and Calvin Coolidge.
Though they could not dismantle the progressive state, Harding and Coolidge (just as Ronald Reagan did later) named conservatives unsympathetic to regulation to head the Interstate Commerce Commission, the Federal Reserve Board, and the Federal Trade Commission (FTC). Republican fiscal policy, guided by Secretary of the Treasury Andrew Mellon, also reaffirmed traditional principles. Though federal spending was not reduced to prewar levels, every 1920s budget was balanced, ending a period of regular deficits that stretched from 1894 to 1919. The national debt, which had risen from __BODY__.2 billion in 1916 to $25.5 billion in 1919, was reduced to $16.2 billion by 1930. Finally, convinced that the 1920 to 1921 recession was attributable to the Wilson administration's high taxes, the Republican governments practiced trickle down economics to justify tax reductions that principally benefited business and the well-to-do as being necessary for the entire economy's good.
In contrast to other Republican leaders, Herbert Hoover had no truck with what he dubbed "the eighteenth century thesis of laissez-faire." As Secretary of Commerce from 1921 to 1929, Hoover made this hitherto minor agency into the most dynamic federal department in the 1920s by promoting its economic planning and coordination capabilities. When the Depression hit, Hoover's brand of progressive conservatism allowed him to become the first president in American history to exercise federal leadership in such an emergency.
On Hoover's recommendation, Congress reduced personal taxes and increased public works appropriations in 1930 and later enacted measures to underwrite credit to farmers, homebuyers, and banks. Hoover's most significant initiative in this regard was the creation in January 1932 of the Reconstruction Finance Corporation, which was initially empowered to extend federal loans to banks and other financial institutions and later authorized to loan funds for self-liquidating state and local government public works. Nevertheless, his activism was constrained by concern to preserve the ethos of free enterprise and self-help that he regarded as fundamental to American individualism. Being convinced that there was no major flaw in America's domestic economy—he denied there was maldistribution of wealth and blamed the severity of the downturn on world conditions—Hoover was determined not to spur the irreversible growth of big government. Accordingly he would not use compulsion to restrict business wagecutting practices and manifested a flinty attitude towards unemployment and farm relief. His anti-Depression programs were largely indirect, involved recoverable outlays (such as loans), and did not entail permanent expansion of the federal budget. As a result they were utterly insufficient to compensate for the catastrophic decline in the private economy.
Hoover's presidential policies represented a pre-modern transitional phase between old-style laissez-faire and New Deal interventionism. His party had little option in the face of Roosevelt's immense first-term popularity but to move further away from its traditional orthodoxy. Some die-hard conservative Republicans and renegade Democrats (including former presidential candidates Alfred E. Smith and John Davis) joined the American Liberty League, created by wealthy businessmen, to demand the restoration of laissez-faire, but its stand hurt the Republican cause in the 1936 elections. By then the bulk of the party recognized the need for some accommodation with the New Deal. The 1936 Republican platform condemned unemployment insurance, old-age pensions, the Wagner Act, and deficit spending, but accepted other Roosevelt policies, including the farm program, federal work relief, and regulation of the financial sector. Even when Roosevelt's popularity declined in the second term, mainstream conservatives did not wholly revert to laissez-faire. The Conservative Manifesto of 1937, a statement of bipartisan congressional conservatism,
demanded lower taxes, less spending, and balanced budgets to restore business confidence but accepted unemployment relief (provided it was not politicized and permanent) and government programs that did not harm or compete with private enterprise (the farm program and large scale public works were acceptable, public utility development was not). Business groups like the National Association of Manufacturers and the Chamber of Commerce also railed against New Deal taxes and deficits. Nevertheless, it was evident by the late 1930s that political and economic debate no longer centered on whether government should intervene in the economy but on the extent to which it should do so.
No Western democracy pursued such a wide-ranging program as the New Deal in the face of the 1930s Depression, but none pursued a wholly laissez-faire approach. In the United Kingdom, the national government rejected New Deal-style public works for expenditure retrenchment and tax increases to balance the budget (which it did from 1934 onward). However, old-age pensions, unemployment compensation, and housing assistance programs were already established in Britain. French governments of the 1930s eschewed macroeconomic activism but some intervened in other ways, especially to improve workers' conditions. It was the need for postwar economic reconstruction that compelled the final abandonment of classical economic doctrine in Western Europe.
BIBLIOGRAPHY
Hawley, Ellis W. The Great War and the Search for a Modern Order: A History of the American People and Their Institutions, 1917–1933. 1979.
Hoff, Joan. Herbert Hoover: Forgotten Progressive. 1975.
Kindleberger, Charles P. The World in Depression: 1929–1939, rev. edition. 1986.
Savage, James D. Balanced Budgets and American Politics, 1986.
Stein, Herbert. The Fiscal Revolution in America. 1969.
