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

by Larry Schweikart

  Were businesses right to expect problems associated with Smoot-Hawley? Hadn’t business interests lobbied for many of the duties that Congress tacked on to the original bill? Business had indeed favored tariffs for decades, but favoring something in general and specifically assessing its impact are completely different. It becomes easier to discover the source of industry’s unease from hindsight. Among other things recent research has shown, the tariff reduced imports by 4 to 8 percent in nominal terms, but when deflationary effects are factored in—and it seems that almost everyone in the country except the Federal Reserve understood that some degree of deflation had set in by late 1929—the real decline in trade attributable to Smoot-Hawley accounts for one quarter of the 40 percent decline in imports after 1930.48

  Other research has shown that changes in trade had a ripple effect throughout the economy, and the tariff alone could have reduced the U.S. GNP by 2 percent in the 1930s. Moreover, “had such tariffs been introduced in any other time period they could have brought about a recession all by themselves.”49 Thus we are left with some fairly obvious conclusions: (1) the Smoot-Hawley Tariff had important disruptive effects; (2) few people knew exactly what form those disruptive effects would take; and (3) unknown to anyone at the time, the Fed made the harmful effects even worse through its policy of deflation. The only link that seems to remain for further research is how much the perceptions of impending chaos affected securities sales prior to the Great Crash.

  The combination of concerns about Smoot-Hawley; the need for a real, but not necessarily large, correction; and the rapid sell-off by speculators triggered a sharp decline. On Tuesday, October twenty-ninth, the market traded more than 16 million shares (compared to a normal day’s 3 million shares traded), and the indexes fell sharply. For the month of October alone, the New York Stock Exchange (NYSE) dropped almost 40 percent in value. By March, manufacturing orders (which had already slowed nearly a year before) dried up. Enter Herbert Hoover, who now turned a bad, but cyclical, recession into the nation’s worst depression.

  Hoover Accelerates the Decline

  Almost immediately upon assuming office, Hoover tried to prop up farm prices, creating another new federal agency with the Agriculture Marketing Act of 1929. Then he turned his attention to the tariff, where Congress had expanded the number of items in the tariff bill and had also substantially increased rates on many other items. Once the crash hit, the banking crisis followed. When the Bank of the United States in New York failed in 1930, followed by the collapse of Caldwell and Company in Nashville, the sense of panic spread. People pulled out their deposits, and the Fed proved unable or unwilling to break the runs. Indeed, contrary to one of the tenets of its charter, the Fed did not even rescue the bank of the United States.50

  Hoover did cut taxes, but on an across-the-board basis that made it appear he cared for average Americans, lowering the taxes of a family with an income of $4,000 by two thirds. As a symbol, it may have been laudable, but in substance it offered no incentives to the wealthy to invest in new plants to stimulate hiring. It was, again, a quintessential Keynesian response—addressing demand. For the first time since the war, the 1930 U.S. government ran a deficit, a fact that further destabilized markets. On the other side of the coin, however, Hoover taxed bank checks, which acclerated the decline in the availability of money by penalizing people for writing checks.51

  Even after the initial panic subsided, the economic downturn continued. Smoot-Hawley made selling goods overseas more difficult than ever; and the public quickly went through the tiny tax cut—whereas a steep cut on the upper tier of taxpayers would have resulted in renewed investment and plant openings, thus more employment. Worse, Hoover never inspired confidence. When the Democrats won the off-term election, taking control of the House, it meant that any consistent policy, even if Hoover had had one, was doomed. As the unemployed and poverty stricken lost their houses and cars, a string of appellations beginning with “Hoover” characterized all aspects of the economic collapse. Shantytowns erected on the outskirts of cities were Hoovervilles, and a broken-down car pulled by a team of horses was dubbed a Hoover Wagon.

  The most significant response by the Hoover administration was the Reconstruction Finance Corporation (RFC), created in January 1932. Viewed by Hoover as a temporary measure, the RFC provided $2 billion in funds for financial institutions that were teetering on the brink. Although the RFC made loans (which, for the time, seemed massive) to private businesses, conditions of the loans actually generated instability in the firms the RFC sought to save. Federal regulations required publication of the names of businesses and banks receiving RFC loans. Banks, which were in trouble because of the collapse in customer confidence anyway, suffered a terrific blow by public notice that they needed RFC funds. This sent depositors scrambling to remove their money, weakening the banks even further. Despite a doubling of its funding, the RFC was a fatally unsound program.

  Having passed a “demand-side” tax cut in June 1932, Hoover then signed the largest peacetime tax increase in history. Whereas the earlier tax cut had proved ineffective because it had dribbled small reductions across too large a population, the tax hike took the form of a sales tax that threatened to further burden already-struggling middle-class and lower-class families. A tax revolt ensued in the House, and when Hoover signed the bill, he further alienated middle America and produced one of the most vibrant tax rebellions since the early national period.52

  Banks found their positions going from bad to desperate. As banks failed, they “destroyed” money, not only their depositors’ accounts, but also whatever new loans those deposits would have supported. Without prompt Fed action, which never came, between 1929 and 1932 the U.S. money supply fell by one third. Had no other factors been at work—no Smoot-Hawley, no RFC, no government deficits—this alone would have pushed the economy over the edge.

  By 1933, the numbers produced by this comedy of errors were staggering: national unemployment rates reached 25 percent, but within some individual cities, the statistics seemed beyond comprehension. Cleveland reported that 50 percent of its labor force was unemployed; Toledo, 80 percent; and some states even averaged over 40 percent.53 Because of the dual-edged sword of declining revenues and increasing welfare demands, the burden on the cities pushed many municipalities to the brink. Schools in New York shut down, and teachers in Chicago were owed some $20 million. Private schools, in many cases, failed completely. One government study found that by 1933 some fifteen hundred colleges had gone belly-up, and book sales plummeted. Chicago’s library system did not purchase a single book in a year-long period.

  Hoover, wedded to the idea of balanced budgets, refused to pay military service bonuses to unemployed veterans of World War I. The bonuses were not due until 1945, but the so-called Bonus Army wanted the money early. When Hoover refused, the vets erected a shack city on the outskirts of Washington. The police shied away from a confrontation, but the U.S. Army under General Douglas MacArthur was called in to disperse the Bonus Army in July 1932. Naturally, MacArthur’s actions were portrayed in the popular press as bloodthirsty and overzealous, but in fact the protesters’ claims had no basis in law, and their deliberate disruption and drain on the resources of an already depleted D.C. metropolitan area represented an attempt to foist off onto others their own desire for special privileges.

  In subsequent decades Hoover would be assailed for his unwillingness to use the powers of government to halt the Depression, but the truth is that his activist policies deepened and prolonged the business downturn. Surprisingly, in subsequent decades, even Republicans came to buy the assertion that Hoover had stood for small government, when in fact he had more in common with Franklin Roosevelt than with Coolidge and Mellon.

  Hoover planned to run for reelection, casting a gloom over the Republicans. The Democrats realized that almost any candidate could defeat Hoover in 1932. It happened that they chose the governor of New York, a wealthy man of an elite and established American f
amily with a familiar presidential name. In Franklin Delano Roosevelt, the Democrats did not merely nominate anybody, but had instead put forth a formidable candidate. FDR, as he came to be known, was the first U.S. president who had never been obligated to work for a living because of his inherited wealth. After an education at Harvard and Columbia Law School, he served in the New York Senate, then, during World War I, he was the assistant secretary of the navy, where he had served well in organizing the supply efforts for the Allies over the ocean.

  Franklin shared with his cousin Teddy the disadvantage of never having had to run or manage a business. He evinced a disdain for commerce; at best he held an aloof attitude toward enterprise and instead developed a penchant for wielding public funds, whether with the navy or as governor of New York. To that end, he had learned how to manipulate patronage better than any politician since Boss Tweed. But FDR also had distinctly admirable characteristics, not the least of which was his personal courage in overcoming polio, which at the time was a permanently crippling disease that frequently put victims in iron lungs to help them breathe. Yet Roosevelt never used his disability for political gain, and whenever possible he kept the disease private after it struck him in 1921.54

  Tutored privately as a child, he went on to attend Groton prep school. There he absorbed the “social gospel,” a milk water socialism combined with social universalism, which was “the belief that it was unfair for anyone to be poor, and that government’s task was to eliminate this unfairness by siding with poorer over richer, worker over capitalist.”55 How much of this he really absorbed remains a matter of debate, but in a 1912 speech Roosevelt revived the themes of community over individual, emphasizing a new era of regulation. He proved less adept at managing his marriage to the plain Eleanor Roosevelt, carrying on with a social secretary (Lucy Mercer) as early as 1914. Alice Roosevelt Longworth, Eleanor’s acerbic cousin, had actually encouraged the illicit sex, inviting the couple to her home for dinner without Eleanor, noting sympathetically that Franklin “deserved a good time. He was married to Eleanor.”56 By 1918 Eleanor had confirmed her suspicions, discovering letters from Lucy to Franklin in a suitcase, and she offered FDR a divorce. Family and political considerations led him to an arrangement with his wife, wherein he would terminate his meetings with Lucy and keep his hands off Eleanor as well.

  After a period of depression, FDR used his rehabilitation from polio to develop qualities he had never had before, including a sense of timing and patience to let political enemies hang themselves. Most of all, his rehabilitation had conferred on him a discipline that he never could have mastered otherwise, committing himself to details and studying public perceptions.

  Best known in the context of his fireside chats as president, Roosevelt successfully used radio, beginning with the 1928 nominating speech for Al Smith, which in a manner, he admitted, he directed specifically to the radio audience. One of his most important speeches, during his first run for the presidency, came on the Lucky Strike Hour, sponsored by the American Tobacco Company. But it was the fireside chats that allowed Roosevelt to connect with large numbers of Americans. He deliberately slowed his speech to about 120 words per minute, well below that of the 170 words per minute at which most radio orators spoke.57 Despite an elite northeastern accent, Roosevelt came across as an ordinary American. One summer night in Washington, he asked, on air, “Where’s that glass of water?” and, after a brief pause in which he poured and drank the water, said, “My friends, it’s very hot here in Washington tonight.”58 Realizing that familiarity breeds contempt, however, FDR carefully spaced his talks in order to avoid losing their effectiveness, aiming for a schedule of one every five or six weeks.

  FDR’s adroit manipulation of the media became all the more important when combined with his pliable approach to the truth. The Depression, he claimed, stemmed from the “lure of profit,” and he decried the “unscrupulous money changers”—warmed-over Populist rhetoric that always played well in tough economic times.59 He knew, certainly, or at least his advisers must have told him, that it was an arm of government, the Fed, which had tightened money, making the Depression worse. One hardly thinks Roosevelt had the Fed in mind when he spoke of “unscrupulous money changers.”

  Once he won the nomination, he had an opportunity to solidify the markets and restore at least some confidence in the economy by stating the truth—that many of his policies would simply continue Hoover’s. But he would not. Between November and the inauguration, Roosevelt kept silent when a few endorsements of Hoover’s policies might have made the difference between continued misery and a recovery. These deceptions illustrated Roosevelt’s continued facility with lying. Nor was he above pure hypocrisy: during the campaign, FDR, a man whose presidency would feature by far the largest expansion of the federal government ever, called for a balanced budget and accused Hoover of heading “the greatest spending Administration in…all our history [which] has piled bureau on bureau, commission on commission.”60 Honest observers can find little difference between his programs and Hoover’s. His own advisers admitted as much. Rexford Tugwell, for example, noted, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”61

  CHAPTER SIXTEEN

  Enlarging the Public Sector, 1932–40

  Economic Chaos

  In addition to all his natural advantages—the flashy smile, personal courage, and his family name—Franklin Roosevelt also had good old-fashioned luck. After narrowly escaping an assassination attempt in Miami, Roosevelt took the controls of the U.S. government just as repeal of Prohibition had cleared Congress, leading to the slogan, “Beer by Easter.” If nothing else, the free flow of alcohol seemed to liven the spirits of the nation. (It also filled the federal coffers, providing new sources of revenue that the Roosevelt administration desperately needed.)

  When voters went to the polls in November 1932, they handed Roosevelt a landslide victory, giving him the entire West and South. Roosevelt received 22.8 million votes to Hoover’s 15.7 million, a remarkably strong showing for the loser considering the circumstances of the Depression. Roosevelt heaped dishonor on the defeated Hoover, denying him even a Secret Service guard out of town. Congress paid a price as well, having done nothing during the lame-duck session because many members knew the new president would purposely torpedo any actions they took.

  In fact, Roosevelt hoped to capitalize on the terrifying collapse of the economy, his own absence of preelection promises, and a timid Congress to bulldoze through a set of policies that fundamentally rearranged the business and welfare foundations of American life. Many of FDR’s programs—undertaken under the rubric of a “New Deal” for Americans—came as spur-of-the-moment reactions to the latest crisis. The absence of internal consistency has thus produced confusion over whether there was a single New Deal or two distinct programs that were dramatically different.

  Time Line

  1932:

  Roosevelt elected; Japanese aggression in China

  1933:

  The Hundred Days; New Deal legislation passed; Bank Holiday; Prohibition repealed; FDR takes nation off gold standard; National Industrial Recovery Act; Adolf Hitler named Chancellor in Germany

  1934:

  Securities and Exchange Commission established; temporary minimum wage law passed

  1935:

  Glass-Steagall Act; Wagner Act; Works Progress Administration; Social Security program created; Neutrality Act passed

  1936:

  Roosevelt reelected

  1937:

  Rape of Nanking by Japanese troops; U.S. gunboat Panay sunk

  1938:

  German expansion in Czechoslovakia; U.S. unemployment soars again

  1939:

  “Golden year” for American cinema; Hitler invades Poland, starting World War II

  1940:

  Roosevelt reelected

  1941:

  Lend-Lease Act passed; Japanese bomb Pearl Harbor; Unit
ed States declares war on Axis powers

  Were There Two New Deals?

  Just as a fable developed about business failures causing the stock market collapse and the subsequent recession, a similar tale arose about Roosevelt’s New Deal program to rescue America. Although most scholars have maintained that there were two New Deals, not one, they differ on the direction and extent of the changes between the first and second. According to one tradition, Roosevelt came into office with a dramatically different plan from Hoover’s “do-nothingism,” and the president set out to restore health to the American economy by “saving capitalism.” However, although the first phase of FDR’s master plan—roughly between 1933 and 1935—consisted of adopting a widespread series of measures at the national level that emphasized relief, around 1936 he shifted the legislation toward reform.