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?
From where comes the belief that Hoover engaged in this kind of bullying?
An article I found (but not carefully read) http://mises.org/journals/qjae/pdf/qjae13_3_7.pdf
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
Yeah, I am sure Hoover had the power to convince business leaders to not cut wages. But if Hoover really believed that this was the way to prosperity (increasing "agregate demand" with high wages), wouldnt he "punish" those business man who are firing employees also? I mean, by what you are saying, Hoover was rewarding those business leaders that didnt cut wages and at the same time were firing workers. Either Hoover was blind or there is something more we are not seeing.
"Anyhow, its not like the pretence of private wage rigidity lasted all that long...."
What do you mean?
thanks so much! I will read it to see if things get more clear =)
Production Workers' Hourly Compensation in nominal $ (From MeasuringWorth.com):
1928 $0.52
1929 $0.52 (0% CPI inflation)
1930 $0.53 (2.3% deflation)
1931 $0.51 (9.0% deflation)
1932 $0.45 (9.9% deflation)
1933 $0.44 (5.1% deflation)
1934 $0.53 (3.1% inflation)
1935 $0.54 (2.2% inflation)
1936 $0.55 (1.5% inflation)
1937 $0.63 (3.6% inflation) <------Result of artificial wage controls
1938 $0.64 (2.1% deflation)
1939 $0.64 (1.4% deflation)
1940 $0.67 (0.7% inflation)
So it looks like if Hoover's influence worked, it lasted about two years. He also encouraged businesses to not liquidate their investments and to construct new facilities.
The prevailing popular ideology was the "new idea" that instead of employers cutting wages to get out of a recession, they would keep wage rates the same to "boost consumption" and keep demand for their products strong. You also have to remember that during the 20s people thought Ford was sucessful because he had raised wages high enough for his employees to "buy back the product". They thought that high wages caused prosperity. We know that this idea is economically fallicious, the greater savings and entrepreneurial skill of Ford is what really caused the wages to rise. His savings and new technologically efficient processes boosted Marginal physical product schedules and hence their wages. In addition, the increasing supply of cars hitting the market lowered their prices and further raised the real wages of the employees.
During the Depression, the employers didn't really have a choice at the beginning. If the refused to maintain wage rates, they would face the wrath of Hoover (who threatened force) as well as general dismay from the business community. As the Great Depression lingered on, businessmen started to realize the futility of what they were doing and attempted to cut wages. Hoover criticized them for breaking the code. Even in 32 when businessmen were forced to cut wages as they couldn't afford to keep paying them, prices fell faster than the wage cuts and real wages still rose.
@nirgrahamUK : Thanks for the link to that paper. It was interesting.
@Gabriel Godinho: If one had a president who wanted wages raised facing a host of completely free-market businessmen who supported the "liquidate labor" advice, things might have been different. In reality, Presidential power is not the sole factor, but one factor. Hoover was not alone in thinking high-wages were a solution, some respected economists, newspapers and businessmen thought so too. Also, it is wrong to think of businessmen as pure profit-maximizing machines. They are people too, and their own moral and political ideology often plays an important role in their decisions. In such an environment, when a president calls a lot of business people to the White house and makes an appeal to them, and where some of them support his theory, and some of them think it might be the moral thing to do even if they have to take a few years of pain, then doubters can sometimes be convinced to be team players at least for a while.
Also, if one reads some histories of the times, many people were taking very seriously communism's boasts that they would beat the Capitalist systems. Labor unions were becoming stronger and many businessmen thought that the pragmatic thing to do was to make some type of structural peace with labor and unions, in order to head off further radicalization. Such considerations could also have played a role.
realistTheorist,
Thanks for your answer
I can accept that businessman decided to not lower wages for all the reasons you pointed. What I cannot understand is how they fired people at the same time, since the reasons to not lower wages would apply to not firing people aswell.
"During the Depression, the employers didn't really have a choice at the beginning. If the refused to maintain wage rates, they would face the wrath of Hoover (who threatened force) as well as general dismay from the business community. As the Great Depression lingered on, businessmen started to realize the futility of what they were doing and attempted to cut wages. Hoover criticized them for breaking the code. Even in 32 when businessmen were forced to cut wages as they couldn't afford to keep paying them, prices fell faster than the wage cuts and real wages still rose."
If there was such a decision of cuting wages by businessman, why the persisting unemployment during the whole decade? Would not the market simply redistribute the workforce and reajust wages fastly (such as in 1920-21) without minimun wage laws?
nirgrahamUK,
great article, thanks a lot.
In 1932 when businessmen started to really cut wages, the price level fell faster, so real wages rose and labor became even more expensive. During Roosevelt's presidency, unemployment was a still a problem because government was crowding out private investment (private investment shrank during the so called Roosevelt recovery). The real wages did go down because of inflation, but not enough to compensate for the lack of business growth due to New Deal intervention. And in 37-38 unemployment shot back up when the government instituted new labor laws (the Wagner act was verified by the Supreme Court, minimum wage law, and Social Security verified).