Hoover was extremely famous and had been sought by Wilson as his successor. Hoover allowed that he could not become a member of a party whose only member in the town where Hoover was brought up (West Branch, Iowa) had been the town drunk. He had reservations about Warren Harding, but endorsed him and was rewarded with the Commerce Department, a new cabinet position that Hoover turned into a great symbol of the ever-rising prosperity of America. He intervened in other departments and with the private sector and became a champion of business efficiency and of government-industry cooperation. He eventually constructed a splendid group of buildings for the Commerce Department, which remain a monument to him. He and Taft were the only presidents elevated directly from the cabinet in the twentith century, and the only presidents who had never previously held either elected public office or high military rank.
As his secretary of state, Hoover selected Colonel Henry L. Stimson, the governor of the Philippines, secretary of war under Taft, and Coolidge’s special representative to the perennial shambles in Nicaragua. He continued the tradition of lawyers running the State Department, but was an enlightened internationalist with a good deal of experience abroad, including as an artillery colonel in the Great War.
11. THE 1929 CRASH
The new administration was quickly overwhelmed by the burst of the immense speculative bubble in the stock market, in October 1929, which wiped out 90 percent of stock market values over the following three years and precipitated the worldwide Great Depression, which laid low the economies of all advanced countries. Commodity prices, and the cost of living generally, had stopped rising in 1927, and residential construction, automobile production, sales and production of consumers’ durable goods, and most categories of industrial investment had leveled or declined slightly. But stock market prices had continued to rise steeply, largely on an immense spike of retail buying on margin (i.e., with unpaid balances of sale, the loan secured by the underlying stock market value).
The commodity price index moved from 100.6 in 1923 to 95.3 in 1929, while the corresponding stock price index rose from 67.7 in 1922 to 190.3 in 1929. These numbers continued downward to 65 and 48, respectively, at the end of 1932. The Dow Jones Industrial Average, which had briefly been at 8 during the Panic of 1907, which President Roosevelt had asked J.P. Morgan to help resolve, had risen to 321 in October 1929, and descended gradually to 34 at the beginning of March 1933.
There was no commercial justification for such a vertiginous rise in the twenties, which was based on the optimism of the times and the propagation of the doctrine that everything was going up and getting better and that borrowing to invest in the growth implicit in the future was almost a sure thing. Statistical economic reporting was sporadic, unrigorous, and under-publicized, and the inherent vulnerabilities of the economy were grasped only by the most astute or intuitively sensible investors. They were rewarded for their restraint and foresight, but the millions of impetuous and unwary, and tens of millions of mere bystanders to the markets, paid a terrible price.
Hoover’s approach to relief was based on principles of rugged individualism, an inability to grasp the gravity of the crisis, and an unwarranted conviction that prosperity would return automatically as part of a cycle. It didn’t. Hoover literally convinced himself that the people who were reduced to selling apples prospered. Hoover was in favor of decentralized relief, and throughout his administration, there was no direct federal assistance to the unemployed. In October 1930, a year after the initial crash, and the beginning of the steep economic downturn, Hoover sponsored a program of voluntary and local assistance, to “preserve the principles of individual and local responsibility.” In December, he requested $150 million for job creation through public works. There were other half-measures, but the crisis generally deepened, with occasional misleading rallies that led to unjustified optimism that the worst was over.
The people were looking for leadership and hope, and Hoover, despite his great talent and warm humanity, was cruelly unfitted for the task so unkindly thrust upon him. He was unable to think in terms beyond voluntarism, local relief, and exhortations of an apparently soulless character to pull up socks, buckle down, and so forth. And Hoover had no political skill at all, as might have been foreseen from his lack of political experience. When a commission he had struck, headed by Taft’s attorney general, George Wickersham, favored substantial changes to Prohibition, Hoover declared himself opposed to repeal. This was an astounding position, given the utter failure of the attempt to enforce temperance.
Veterans agitated for prepayment of bonuses voted to them, and when the measure was approved by the Congress, Hoover vetoed it as extravagant and likely to reward many who were not in need. This led eventually to the catastrophic fiasco of the “Bonus March” of 17,000 veterans on Washington in the spring of 1932. The government offered to pay their way home and most accepted the offer, but 2,000 refused to leave their squatters’ camp on Anacostia Flats, and when the District of Columbia police tried to remove them, four deaths resulted. Hoover called on the army to move them out, and the chief of staff of the army, General Douglas MacArthur, assisted by his aides Lieutenant Dwight D. Eisenhower, who counseled moderation, and Lieutenant George S. Patton, who urged severity, cleared them out without loss of life, using cavalry, tanks, and infantry with fixed bayonets. This was not a good political image-builder.
The Republicans lost control of the Senate in 1930, after controlling it for 12 years, and lost 52 congressmen, and then several more after the election, through death and special elections, and Texas Democrat John Nance Garner replaced Theodore Roosevelt’s son-in-law, Nicholas Longworth, as Speaker. Roosevelt was reelected governor of New York by the unheard-of margin of 725,000 votes. Hoover moved late to try more substantial relief measures. In February 1932, he set up the Reconstruction Finance Corporation, which was capitalized at $500 million, with authority to borrow up to $2 billion. The RFC was authorized to invest in financial institutions, including farm mortgage associations, as well as railways and building-and-loan societies. It could issue tax-free bonds and was designed chiefly to fight deflation rather than absorb the unemployed directly.
The RFC was strengthened by the Relief and Construction Act in July 1932, authorizing further borrowings of $1 billion, and was tasked with financing local public works schemes, which would engage the unemployed. The Federal Home Loan Bank Act, also enacted in July 1932, was designed to assist families with delinquent mortgages and encourage a revival of residential building, but with only $125 million it was, like the rest of Hoover’s program, too little and too late. By the end of 1932, industrial production had declined by almost half from 1929, and by March of 1933 the banking and stock and commodity exchange systems had collapsed and were shut down almost entirely. There were between 15 and 17 million unemployed, about one-third of the entire work force, and farm and residential mortgage foreclosures threatened more than 40 percent of the whole population.
Herbert Hoover had famously said, shortly after the first stock market reversals in 1929, “The economy is fundamentally sound,” and by late 1932 was promising that “Prosperity is just around the corner.” By this time, Hoover had convinced himself that the economic crisis was an international phenomenon that had descended more or less like a malignant act of God, that he was blameless, and that what was needed was concerted international action to maintain strong currencies and avoid inflation and, as far as possible, deficits. In the light of subsequent history, it is clear that his policy prescriptions were the worst that could have been devised: income tax increases in 1930 to reduce the deficit, the shrinking of the money supply by the Federal Reserve Bank of New York, and the Smoot-Hawley Tariff of 1931, which raised duties to stratospheric levels, assuring retaliation. But economics, inexact and notoriously dismal science though it is, was quite rudimentary at the time and Hoover must not be judged by contemporary standards of knowledge of the role of the money supply and other factors in the level of economic activity, though he could certainly have been more imaginative and less dogmatic.
Manufacturing industry was confined to the domestic market, and agricultural exports were bought by the government at unsustainable prices and dumped in the world market, where the produce was bought with loans granted by the United States, on which the borrowers generally defaulted. It was an utterly futile policy, impoverishing American farmers and foreign consumers, and famishing disadvantaged Americans. Other advanced countries were also hard hit by the Depression. The United States was the most relatively contracted economy, because the speculative bubble had been larger there, and Hoover’s Republican notions of self-help resisted public assistance on the scale that electorates in Canada and Western Europe more promptly demanded. There were also, at the end of Hoover’s term, the first stirrings of rising militarism in the world, in Japan and in Germany, which led to increases in the armed forces and the defense-production industries in those countries, soaking up the unemployed, and soon provoked similar measures in other countries in response to them.
12. INTERNATIONAL ECONOMICS AND ARMS CONTROL
In this unpromising ambiance, Stimson did manage to maintain a consistent foreign policy, and a somewhat more substantive one than Hughes’s policy of unilateral disarmament by the democracies, and Kellogg’s claim to have banned war. The first priority was the collapse, yet again, of the reparations scheme, the Dawes Plan (Chapter 10). Dawes, an eccentric figure who as vice president had quarreled with Coolidge, and who was comptroller of the currency under McKinley and a general of engineers in World War I, was now directing the RFC, which invested $50 million in Dawes’s City National Bank of Chicago. This did not prevent it from going under a year later, and Dawes concluded his public career as a well-regarded ambassador to Great Britain. The Young Plan, named after industrialist Owen D. Young, reduced German reparations to $8 billion, payable over 58 years. This was a hopeful effort to catch the moving target of increasing economic distress, but in June 1932, the Lausanne Conference scrapped 90 percent of the remaining reparations (and Germany declined to repay more than a fraction of that the following year).
Parallel to this was the collapse of war debt repayments to the United States. The booming economy through most of the twenties, after the crisis of German hyper-inflation, enabled Germany to pay some reparations to France and Britain, which sent them on as war debt mitigations to the United States. The onset of the decline of business activity in the United States, the shrinking of the American money supply, and the reescalation of tariff wars assured that the contagion of economic deflation afflicted every country where the government did not intervene to raise spending, assure liquidity, and stimulate consumer demand.
The Italian Fascist government of Benito Mussolini, who had seized power in 1922, somewhat enhanced the military and engaged in showy public works projects as well, to absorb the unemployed and assure the absence of misery. Italy remained a private, if not exactly a free, enterprise economy, and avoided the worst of the Depression, though it was only a somewhat prosperous country in the northern industrial heartland between Genoa, Turin, and Milan.
The Japanese combated the Depression with a straitjacket of economic controls and the mobilization of all unallocated manpower by the armed forces and for defense production. In the Soviet Union, where Lenin had died in 1924 and was succeeded by Joseph Stalin, whole categories of the population were starved to death or otherwise liquidated in the drive to collectivization and the implementation of the command economy. Some formidable feats of engineering in public works were achieved, and much heavy industry was added and modernized. Apart from recalcitrant constituent groups or those deemed ethnic or class enemies of the regime (and their numbers were considerable and their fate terminal, as Stalin, in the course of his 29-year dictatorship, murdered at least 20 million of his countrymen), basic food, medical care, education, and shelter were available to the continuing population. But the collectivist drive consecrated most effort to building the infrastructure, industrial base, and military strength of the Communist regime. Stalin did achieve prodigies of productivity by eliminating millions of people and arbitrarily overvaluing production. None of the Soviet government’s statistics could be believed, and it was impossible to make valid comparisons with other countries.
Banking and currency crises began in earnest in 1931, with the failure of a large Austrian bank, an attempted bail-out of Austria by the Bank of England, heavy withdrawals of deposits in German banks, and Britain’s abandonment of the gold standard on September 21, 1931. Hoover proposed a one-year moratorium on reparation and war debt payments in June 1931. Most countries that were affected agreed promptly, but France, always suspicious of anything that might advantage Germany, dithered for a month, in which time the German banking system effectively collapsed. All banks in Germany were closed by the middle of July. The banking system was adequately reinforced by the German Central Bank to resume functioning more or less normally after a couple of weeks, but Europe’s largest economy was in steep decline and social unrest was already severe, as the Communists and Adolf Hitler’s National Socialist German Workers’ Party (Nazis) crowded the Catholic and Protestant center parties. French premier Pierre Laval visited Hoover in October, and it was agreed that the moratorium was likely to continue for the balance of the Depression.