AGD - Chaper XI: The Hoover New Deal of 1932

Facing a USD 1 bn budget deficit, Hoover imposed the most drastic tax increases in US history (doubling income tax to 4 – 8 %, increasing income tax surcharge to 63 % (sic!), establishing a 33 % gift tax, …). Despite the rate increases, Federal revenue declined in 1932 as the tax base eroded. Federal expenditures also declined by 1 USD bn. So in the midst of a deep depression, Hoover raised the taxes and cut spending. Overall, the public share of GDP increased significantly. 

Agitation for even more public works continued, with suggestions for new programs topping each other. In the meantime, even Hoover got his doubts and direct programs where expanded only a little compared to 1931. Inducing the Reconstruction Finance Corporation (RFC) he still propagated ‘self-liquidating’ public works. From Feb. to June 1932, the RFC handed out USD 1 bn worth of loans (it was founded on USD 0.5 bn of government capital and USD 1.5 bn of issued debentures). Most of this was given to banks and railroad companies. Already in June the first president of the RFC had to leave office, the Chicago bank he headed being granted credit from the RFC. 

Mid 1932 the nation’s first Federal relief legislation was enacted. Inflation continued with the Glass-Steagall Act broadening the asset base for rediscounts with the FED and permitting the FED to use government bonds as collateral for its notes. While the monetary base was broadened, the private sector did contract. Banks decelerated lending and started to hold ‘excess’ reserves. With artificial low interest rates but high business risk, incentives for lending out where not sufficient. Government started to blame ‘hoarders’ and ‘non-cooperating’ banks. Another field for blaming was the stock market, where especially short-sellers and the NSYE’s failure to hinder short-sellers were identified as reason for stock prices not representing ‘true values’.

The Home Loan Bank System was enacted late 1932, and the bankruptcy laws changed, so that a majority of creditors could accept extended time for repayment. (Common standard today, but it clearly means that some creditors are forced to let go a share of their assets by a voting party they had not chance to influence the composition.) And finally, the fight against immigration continued with anti-immigration laws enacted.