10 - Official model II as shaped in May 1932 and the aftermath

Summary

Though debates among the academic economists would continue to rage about the proper interpretation of events and about appropriate courses for economic policy, Hoover could not wait until the professionals resolved their differences before deciding on next steps. By May 1932 it was clear that the attack on the liquidity trap begun in February had failed. Hoarding had begun again, the rate of bank failures – which for a time had been slowed – accelerated, and the gold outflow had resumed.

These setbacks notwithstanding, the experience of the preceding months had still taught some lessons. In the first place, it had exposed the fragility of the banking structure even more clearly, and this seemed to underscore further the importance of a fiscal policy designed to support bond values. Second, it had demonstrated that banks could not be relied upon to stimulate the flow of credit, even when their capacity to do so had been considerably augmented. This finding suggested that other measures would be needed to reactivate lending and spending. Third, the disappointing performance of the economy meant that the administration's hopes that the momentum of recovery would be well underway by the early autumn were unlikely to be fulfilled. In view of that prospect, a rethinking of the federal government's role in the provision of relief appeared to be in order.

Even though the strategy adopted at the beginning of the year had not achieved its objective, Hoover was determined to regain the initiative. He could agree with part of the diagnosis of the situation then offered by Keynes.