When trying to understand the causes of the Great Depression, the most important thing to understand, in my opinion, would be the high unemployment at the time. So, the best explanation I saw, coherent to economic theory, is that at the time, Hoover had stablished a "High Wage Policy", that caused wages to remain high enough to cause unemployment.
If I understand it correctly, the High Wage Policy of Hoover consisted in convincing business leaders and other influential people that a reduction in money wages would cause a big drop in demand, causing more unemployment, and so on. Of course, he was wrong, and that is not what I am curious about.
What makes me curious about this explanation is: Why would business leaders follow the advice of Hoover?
And most importantly: Assuming that the business leaders agreed with Hoover and did not reduced wages. Soon they would be forced to fire workers, or even close their firms (which would be the explanation of the unemployment). In this situation, does it makes any sense to say that the business man would rather fire workers or close their firms instead of reducing wages? I mean, they would obviously realize that firing workers causes a much higher impact at the purchasing power of the workers than reducing their wages, also, following Hoover's advice would be of huge personal cost for the employers.
It is just hard to imagine an boss sending his workers to the street saying: "Oh sorry, its just that I pledged to not reduce your wage, so I need to fire you".
Were there any laws or any other reasons (beyond Hoover's asking everyone to not reduce wages) that could have caused the wages to remain high, causing the unemployment?
I've wondered this myself.
A better explanation might be that the unemployment causes the high wages, not the other way around.
I don't think so. If employers are firing workers and it is hard to find a job, the employed people would be willing to accept a lower wage in order to stay competitive. Also, the unemployed workers would also be willing to accept low wage salaries if it's hard to find a job. So, I don't see any reason why would unemployment cause higher wages, in fact, the opposite could be possible in my opinion.
Hoover's influence wasn't very strong and it is generally accepted that the Fed's monetary policies caused the Depression.
In a recession, unemployment creates an excess inventories of goods due to deficient demand. This causes the price of goods to fall. Nominal wages will fall slower than nominal prices, raising real wages. Unemployment leads to higher real wages, not the other way around.
>>It is just hard to imagine an boss sending his workers to the street saying: "Oh sorry, its just that I pledged to not reduce your wage, so I need to fire you"
yes, its impossible to imagine in a free market where Hoover is just some guy with an opinion, even a respected one like 'an economist', but Hoover was the executive of a powerful predatory force, so you have to take his threats seriously. Its not like no big business has ever been nationalised by a government with 'strong opinions' on how a business should be run.....
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Coase, we are assuming that Keynes was wrong here. What you are saying is a whole other discussion
resist27, Yes, I agree that the the primary cause of the bust was the FED's monetary policy. My question is about the persisiting unemployment following the bust, that turned the bust into the depression (unlike 1920)
It makes a lot more sense than "Hoover bullied people."
I've never seen anything more specific than that regarding Hoover btw. No specific quotes of Hoover saying, "Anyone who lowers real wages is gonna get it good from us Feds." No evidence at all, actually.
nirgrahamUK,
Even being an influential individual, it is not very clear what Hoover did to hold wages high (and at the same time allow business to fire workers!).
In other words... how Hoover did this? Just by asking?
Give me presidential powers and lets see how hard I find it to get you to do things for me.
By the way, I was talking about money-wages only. I understand that real wages go up since prices fall.
How would you have convinced businesses to keep prices set if you were Hoover?
I agree, I was just curious on how he did it, since "asking" or "convince that is good for everyone" seems not to make any sense.
Maybe there were any agreements? Or a law? I dunno... - The point is: however he did it, he must have made it worthy for business leaders not to reduce wages. So why would he do it and at the same time give them a green light to fire employees?
He's the boss of an organisation that takes in money and spews it out, ina political climate that embraced large scale spending on public works, I'm sure he can point it at 'friends' and away from 'enemies'.
And he was the executive of an agency that can pass a law restricting foreign trade (smoot hawley).... maybe he can shut you down?
oh, and if you sign up as 'pledger' you can claim patriotism and all that good stuff.
Anyhow, its not like the pretence of private wage rigidity lasted all that long....