A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror

by Larry Schweikart

  Delegates from the major naval powers of the world were invited to a conference in Washington in 1921. Hughes directed the tenor and direction of the meeting toward arms limitations, especially on what some had called “the ultimate weapon,” the battleship. Like many arms control agreements that followed, the Five Power Pact that emerged from the Washington conference relied on maintaining rough equality of weapons among the participants, enforcing a sort of balance of terror. Signatories agreed to limits on the tonnage (that is, tons of water displaced as an indicator of the size, and often type, of ship) each nation would build. For every 525,000 tons of capital ships the United States built, England could build the same amount; Japan could build 315,000 tons; and France and Italy, 175,000 tons each. Over time, the agreement came to be referred to by a sort of shorthand reference to the tonnage limitations, namely the 5-5-3 ratio. Moreover, Hughes urged the delegates to cancel production entirely on all those battleships currently under construction.

  Met with a “tornado of cheering” as “delegates whooped and embraced,” the agreement was a typically utopian and wrongheaded approach to maintaining peace.29 Nations indeed limited the tonnage of ships, but instantly cheated by changing both the character and lethality of such vessels. On the one hand, they shifted production to a newer ship type that would soon prove far more potent, the aircraft carrier (which had not been covered in the agreement), and on the other, they simply installed more, and bigger, guns on existing platforms. Indeed, many of the Japanese carriers that struck Pearl Harbor were battleship hulls converted in the wake of the Washington agreements and retrofitted with carrier decks. And it was no accident that the size of long-range guns mounted on existing battleships and cruisers increased, from twelve to fourteen inches aboard the USS Arizona, sunk at Pearl Harbor, to the sixteen-inch guns of the USS Missouri and the eighteen-inch guns of the German superbattleships Bismarck and Tirpiz. Japan topped everyone with its massive battleships Yamato and Musashi, each featuring nine eighteen-inch guns. All nations reinvigorated their submarine programs as well. Thus the Washington conference had the ironic effect of encouraging the development of two new weapons—the carrier and the submarine—that would prove far more effective than the increasingly obsolete battleships the treaties sought to control.

  Few paid any attention to such realities. The euphoria of arms control reached its absurd conclusion in 1928 with the Kellogg-Briand pact (named for Frank Kellogg, U.S. secretary of state, and Aristide Briand, French foreign minister), which outlawed war. War was now illegal! One wonders if the delegates had considered repealing the law of gravity while they were at it. The ink on this incredible document, signed with a foot-long pen of gold, remained dry for scarcely a decade before Adolf Hitler plunged the world into the most catastrophic war in human history.

  Coolidge refused to be sucked into the orbit of the “outlawrists.” He did not oppose arms limitations on general grounds, but rather doubted that the European powers would limit their own numbers of ships in any significant way. He had the luxury of knowing that in a practical sense, the only way the United States was vulnerable to a direct attack was by sea, and therefore American security could be achieved by reducing the ability of others to build capital ships. Coolidge also saw the potential for arms reductions to further limit the size of government expenditures and thus the size of government—something he always considered worthwhile.

  Significantly, after a brief foray into an international arms reduction agreement in 1926–27, Coolidge realized that foreign powers were not about to sacrifice any advantages they held. In 1927 he therefore recommended a nine-year naval development program, and although he “never completely surrendered hope that the powers could…restrict their sea strength…he could take no chances with his country’s defenses.”30 It was vintage Coolidge: reduce government, promote peace, but protect yourself and stand firm when necessary.

  The New Deal Writ Small

  Coolidge could have stood for reelection, but he chose not to. In his Autobiography, he pointed to the fact that presidents who served eight years were not effective in the latter parts of their term. Some suspect Coolidge sensed that an economic downturn lay ahead. Still others point to odd statements by Coolidge, whose son died in 1924 of an infected blister on his foot, suggesting the president believed his death was some sort of spiritual “price exacted for occupying the White House.”31 Whatever the reason, with typical Coolidge brusqueness, during a press conference, the president quietly marched down a line of newsmen, handing them each a little strip of paper with the words, “I do not choose to run for President in nineteen twenty-eight.”32

  His successor, Herbert Clark Hoover (1874–1964), could not have been more different from Silent Cal. The secretary of commerce who had headed the Food Administration during the First World War, Hoover represented the latest in a long line of Republican Progressives whom Coolidge despised. Hoover thus inherited the Teddy Roosevelt/William Howard Taft wing of the Republican Party. In some ways, this progressivism, especially as exhibited by Hoover, was a type of devout religiosity, with an emphasis on perfection of this world, as opposed to the traditional Christianity practiced by Coolidge, with its presumption of man’s sinful nature.

  Certainly, Hoover was religious. He was born of Iowa Quaker stock, and his church training stayed with him to the point where he refused to play in Harding’s White House poker games. Far from being conservative in the nineteenth-century sense of the word, Hoover’s views entitled him to be described by one biographer as a “forgotten Progressive.”33 He displayed his “forward-looking” views across a wide spectrum of policies, telling his confidants that he wanted “very much to appoint a woman to a distinguished position” only a decade after women had received the franchise, adding, “if I could find a distinguished woman to appoint.” His policies anticipated most aspects of Franklin Roosevelt’s New Deal Depression remedies.34

  Of course, many of the comments hailing Hoover as a Progressive come from a liberal historical school that endorsed the expansion of government, and by any yardstick, Hoover was a big-government type. The Department of Commerce increased its bureaucracy under Hoover, growing by more than two thousand employees and $13 million at a time when every other department in government was shrinking. He was the quintessential manager, in both the best and worst senses of the word, coining new phrases and generating streams of new reports. It should not be a surprise that, before running against him in an election, Franklin D. Roosevelt called him “a wonder” and added, “I wish we could make him President…. There couldn’t be a better one.”35 Those same traits—his obsession with paperwork and bureaucratic forms—caused Coolidge to hold him in contempt, calling him “wonder boy” and noting that Hoover had given him “unsolicited advice for six years, all of it bad.”36 Hoover was too entrenched to kick out, but Silent Cal had scarcely said a good word about him, even during the campaign.37

  Hoover’s work with the bureaucracy took his natural affinity for capitalism and seasoned it with a dose of corporatism, the notion that large-scale planned organizations could direct outcomes better than a laissez-faire method. But perhaps a better word for describing Hoover’s approach to government than “corporatism”—which often suggested a form of Benito Mussolini’s fascism—was “activism” or even a revival of the old mercantilist view of the world. As commerce secretary, he sought to “rationalize” the coal industry, an approach that would have horrified Lincoln or Jefferson. He concocted a scheme reminiscent of Albert Gallatin’s inland waterway plan, proposing a “comprehensive system of inland waterways that would aid the farmer.”38 These private/public “cooperation” policies allowed biographers to claim that Hoover’s presidency incorporated “a philosophy of individualism through the coordination of capital, government, and labor.”39

  Despite his willingness to employ the federal government to solve problems, Hoover’s name, especially after the Depression, was almost exclusively associated with “rugged individualism�
� in a negative sense. As the economic collapse deepened, people assumed he did not care for their plight, despite the fact that he had pushed federal involvement in the private sector to unprecedented peacetime levels. It did not help that he had written a book called American Individualism in 1922.40 Unlike Coolidge, who had no compunction about allowing a recession to lower wages, Hoover saw high wages as critical to maintaining prosperity. In that respect, he displayed the classic Keynesian approach to economics that would soon captivate policy makers in the West: demand was what counted, not supply.

  Hoover won in 1928 because of Coolidge’s peace and prosperity—always a tough row to hoe for a political opponent. The opponent, Democratic candidate Alfred E. Smith, governor of New York, represented the growing anti-Prohibition movement. Smith, a Catholic, suffered from anti-Catholic prejudices and the American distrust of New York urbanites, which helped Hoover, as did his Quaker moralism and his seeming concern for common Americans. “A chicken for every pot and a car for every garage,” he intoned, and the press that he had carefully cultivated carried his proclamations with enthusiasm. Major newspapers endorsed him wholeheartedly. Some of their commentary seems absurd, given the scorn the nation heaped on him just four years later: he was called the “most useful American citizen now alive,” “a new force in economic and social life,” associated with unfailing integrity, and even “a genius.”41 In some ways, Smith held positions more conservative (and more in line with Harding and Coolidge) than did Hoover: he opposed government interference with business and the rising expenditures of federal agencies, and he favored restraining or cutting back the Washington bureaucracy.

  More Americans voted in the presidential election of 1928 than ever before(67.5 percent of those eligible), and Hoover won in a landslide, 444 electoral votes to Smith’s 87, racking up more than 21.3 million popular votes in the process. Yet Smith virtually swept the big cities—St. Louis, Cleveland, San Francisco, New York, Boston, Philadelphia, Chicago, Detroit, and so on—laying the groundwork for the Roosevelt coalition four years later. It marked the first time in the twentieth century that the big urban areas went overwhelmingly Democratic, a position they had not relinquished by the year 2000.

  From the hindsight of nearly seventy years, it would appear that when Hoover was inaugurated in 1929, he had jumped behind the wheel of a flaming gasoline truck with no brakes headed over a cliff. But only in hindsight. Hoover’s perspective was that he had the opportunity to end the business cycle once and for all—to use the tools of government to manage minor dips and hiccups. Given the emphasis on planning, could not any obstacle be overcome? With enough information, could not even the economy be controlled?

  Crash and Depression

  On October 29, 1929, the economy just dropped off the table. Or so the story goes. In fact, several sectors of the economy had experienced slow growth or even stagnation in the 1920s. Then there was the Federal Reserve, which failed to expand the money supply at a pace that would support the growth over the long haul. The slow drain caused by the weakened agricultural sector had started to afflict the financial structure. Manufacturing indices started a natural slowdown by mid-1928. These rather hidden factors were greatly exacerbated by the Smoot-Hawley Tariff; then, once the crash occurred, the government made almost every poor policy decision possible.

  Farming had never recovered from the end of World War I. By 1927, farm bankruptcies stood at about 1.8 per 100, a rate lower than all American businesses. And farm income averaged $7 billion from 1923 to 1929, after averaging only $4.6 billion during the boom of World War I.42 Only later, in the midst of the Depression, did economist Joseph S. Davis observe that “in retrospect, in the light of revised data and a truer perspective, [the mid-to late-1920s] should properly be regarded as moderately prosperous and relatively normal for agriculture.”43 Much anxiety came from the so-called parity formula developed by the U.S. Department of Agriculture and pushed by a pair of farm industrialists, George N. Peek and Hugh S. Johnson of Moline, Illinois. They sought to maintain a relationship between the prices of farm and nonfarm goods. The idea was deeply flawed in that no fixed relationships exist between any goods or services, but rather are always subject to laws of supply and demand. Worse, not only did the USDA’s parity formula understate farm income, it also failed to take into account the revolution in mechanical motorized farm equipment, which essentially combined the genius of Henry Ford, John Deere, and Cyrus McCormick. That equipment tended to increase production as farmers plowed far more land, which was good, but depressed prices, which was a continued source of concern. American farmers could overcome price declines with higher overall sales, but that required open markets, and increasingly the Europeans had erected tariff barriers to imported goods that limited American agriculture’s foreign sales.

  The drop in agricultural prices gave the impression that farms in general were in trouble when that was not true, but added to the price decline came several natural shocks that destroyed the livestock and farm economies of several specific regions. Wyoming experienced such a terrible winter in the mid-1920s that bankbooks literally froze in their cabinets and livestock herds were decimated. As the collateral for livestock loans disappeared, banks in agricultural sectors started to struggle, with many of them closing. A similar set of natural weather and insect phenomena struck the Deep South, destroying huge swaths of rice and cotton farms. Coolidge resisted McNary-Haugenism, a movement named for the sponsors of several bills (Senator Charles L. McNary of Oregon and Representative Gilbert N. Haugen of Iowa) to have the government purchase surplus agricultural production to maintain the parity prices. He vetoed two such bills, arguing that they would encourage one-crop farming, and he made the vetoes stick.

  Pockets where farming was collapsing, especially in the Midwest, certainly weakened the banking system by saddling banks with a mountain of bad debts. Bank distress then contributed to the second problem that developed in the 1920s, namely, the slow growth of the money supply. Although no nationally known banks failed before 1930, state banks in the West and South had failed in droves in the decade. Many of those institutions had small, even minuscule, capital, and they passed away without notice. But just as banks “create” money through fractional reserve banking when people make deposits, the banking system “destroys” money when banks fail. The Federal Reserve should have deliberately offset those failures—and the contraction of the money supply caused by them—by reducing the interest rate it charged member banks and making it easier for banks to borrow money. Yet it did not: quite the opposite, the Fed had not even been keeping up with the growth indicators of industry, regardless of the drain posed by the agricultural sector.

  The nation’s money supply, contrary to the claims of many economists and historians, simply failed to keep up with output. One reason even conservative historians like Paul Johnson and mainstream textbook writers have failed to discern this fact is that, once again, they have become obsessed with stock prices. This even led the conservative writer Paul Johnson to claim that the market was “pure speculation, calculated on the assumption that capital gains would continue to be made indefinitely.”44 Many authors cite the price of RCA stock, which went from $85 to $420 a share in 1928, with Johnson noting that RCA had not paid a dividend. But Carnegie Steel had never paid a dividend either when its value had soared fifty years earlier. Radio sales had expanded far faster than stock prices rose, and an argument could be made that RCA stock was still undervalued even after its spectacular rise. At any rate, securities provided only one snapshot of the economy, whereas the money supply touched everyone from the dockworker to the dentist, and from the typist to the tycoon. As the availability of loans shrank, business had less cash with which to continue to grow.

  That was seen in a third factor, the slowing of the manufacturing sector in mid-1928. Contrary to demand-side economists like John Kenneth Galbraith and the renowned John Maynard Keynes, demand did not disappear in the late 1920s, and wages remained high enough to pu
rchase most of the vast number of new conveniences or entertainments. But firms could not add new production facilities without bank loans, which, instead of increasing, tightened when the Fed grew concerned about speculation. Members of the Fed’s board of governors mistakenly thought banks were funneling depositors’ money into the stock market, and further dried up credit, instigating a shrinkage of the money supply that would not stop until 1932, when it had squeezed one dollar in three out of the system. Evidence suggests that corporations sensed the tightening money supply, and cut back in anticipation of further credit contraction.45

  One factor that can account for the sudden nature of the crash, however, was the Smoot-Hawley Tariff. This tariff increased rates already enacted under the Fordney-McCumber Tariff, by about 20 percent on average, but rates were increased much higher on some specific goods. Obviously, the passage of the tariff in 1930 discredits assertions that it shaped perceptions in late 1929—unless one takes into account the legislative process. Former Wall Street Journal writer Jude Wanniski raised the argument in 1978 with his book The Way the World Works that uncertainties over the effects of the tariff may have triggered the stock market sell-off.46 In the 1990s a new generation of scholars interested in trade revisited Wanniski’s views, with Robert Archibald and David Feldman finding that the politics of the tariff generated significant business uncertainty, and that the uncertainty began in 1928 (when manufacturing turned down) and grew worse in late 1929.47

  The timing is crucial. The bill cleared key hurdles in committees in the autumn of 1929, with key votes coming just prior to the Great Crash. Certainly if business leaders became convinced that the tariff, which promised to raise the tax on imports of virtually all items by as much as 30 percent, would drive production costs up, and thus reduce sales, they would have prepared for it as soon as possible. From that perspective, it is entirely possible that expectations that Smoot-Hawley would pass may have caused a massive sell-off in October 1929. And after the crash the worst fears of the Smoot-Hawley opponents came to pass as European nations enacted higher tariffs on American goods, forcing prices on those imports up further and reducing demand. Companies’ expectations were, in fact, critical. If companies believed that the tariff would pass, and if they therefore expected hard times in 1930, it stands to reason that among other precautions they would take, firms would increase liquidity by selling off some of their own stock. Such sales alone could have sent dangerous signals to average investors, which then could have sparked the general panic.