Herbert Hoover
Page 28
Just as the London Naval Treaty was a long-term negotiation that required a great deal of preparation over an extended period, Hoover knew that confronting the international financial crisis would require extensive global cooperation. In mid-1931, the American economy was stagnant, but not appreciably worsening, until it was affected by events from abroad. Virtually every European nation was deeply in debt, with a shaky economic and political infrastructure, having failed to recover appreciably from the Great War. In early May, Austria and Germany proclaimed a customs union, which abolished trade barriers between the two nations. The move was designed to bolster the staggering economies of both countries, perhaps averting political anarchy, yet such a union was forbidden by the Treaty of Versailles. Britain and France, which had largely dictated these provisions in the treaty, vetoed the merger. The crushing of the credit and tariff agreement led to a run on the German mark and the collapse of the Kreditanstalt, which held about half of the deposits of Austria. Both Germany and Austria were in imminent danger of panic and a political revolution producing a totalitarian dictatorship.28
The punitive provisions of the Treaty of Versailles fastened on the defeated powers by the victors were coming home to roost, and the shadows of a dark future crept across the continent. The Allied nations owed war and postwar debts to America, which they could pay only if they received reparations owed them by Germany. Neither bloc of countries could pay without bleeding the other dry. It was politically as well as economically impractical to keep the promises made in the wake of war. Hoover hurriedly devised a high-stakes plan to provide a respite: he proposed a one-year moratorium on all intergovernmental debts, both war debts and reparations, during which period a permanent solution would be negotiated. The French, who wanted to cripple Germany if not decapitate their potentially powerful rival, initially blocked ratification but finally yielded. Hoover summoned a special session of Congress, at which the Senate ratified the moratorium 69–12 following ratification in the House by 317–100 on December 22, 1931. By this time, Britain had already left the gold standard, on September 21, and the pound sterling, the primary standard for ordering the world’s trade, had become a victim of the Depression.29
Hoover’s debt moratorium was only a respite, not a permanent solution. The debtor nations had a little more than a year to sort out their finances. A second problem existed. The Hoover moratorium pertained solely to debts between governments, primarily war debts and reparations. In addition, European and Latin American banks had pyramided high-interest loans based on bonds and securities issued by private banks and loan institutions offering such deliciously high interest rates that they drained American capital into risky investments that were, in fact, a glorified Ponzi scheme. When payments for short-term, high-interest loans approached, the borrowing institutions postponed the day of reckoning by issuing yet higher-interest loans based on a longer term. Many such bonds were issued by municipalities and state governments in Central and Eastern Europe and some in Latin America. Their common element was an effort to lure capital based on capricious interest rates destined to produce ultimate ruin for everyone concerned, including the investors and depositors of those foolish enough to invest in such inflated securities. Through an international consortium of private financial institutions, Hoover was able to iron out through several conferences, confirmed at Basel, a one-year standstill agreement, which did for private investors what the debt moratorium did for governments, that is, to create a breathing spell for them to untangle their finances and to minimize their losses. The public debts—war debts and reparations—were still unsettled at the time Hoover was succeeded by Franklin D. Roosevelt in March of 1933, and ultimately only tiny Finland repaid its war debts to the United States in full.30
While the Great Depression continued to deepen despite Hoover’s debt moratorium, a trail of diplomats made the pilgrimage across the Atlantic to seek the favor of the president. In November 1931 Hoover met with Dino Grandi. The dashing, charismatic foreign minister of Italy was fluent in English and only thirty-six, and he charmed the American press and public. With no major issues dealing with trade or diplomacy between the United States and Italy, Grandi’s visit was largely ceremonial. A rising star in Europe, he represented an important nation then in the process of shifting its military and diplomatic orientation. In their discussions, Grandi and Hoover agreed to form a common front in favor of disarmament at the upcoming Geneva conference, and they concurred that France would pose the major obstacle. Grandi himself was gaining favor in Europe as a prophet of peace, while at home, Benito Mussolini, who was pivoting toward militarism and aggression, viewed him as a potential rival. Grandi’s visit to America, measured by public opinion on both sides of the Atlantic, was a success—perhaps too much of a success for his own good. Shortly after Grandi returned to Italy, Mussolini, somewhat jealous of Grandi’s growing renown, sacked him, as well as three other ministers and eleven undersecretaries, consolidating power in his own hands, manhandling opposition, and throwing overboard his former foreign minister’s experiment with small-stick diplomacy. Il Duce now held three cabinet positions in addition to being premier: foreign affairs, home affairs, and commerce. The doves of peace were giving way to the hawks of war.31
On October 22, 1931, French premier Pierre Laval arrived in New York, then took the train to Washington, where he met Hoover on the following day at the White House. After a state dinner, the leaders, joined by interpreters, talked until after midnight. The American president privately told the Frenchman that he believed France had supplanted Britain as Europe’s greatest power, primarily because of its more robust economy. Militarily, too, France was Europe’s greatest power so long as Germany remained disarmed. The chief agreements were economic. Laval promised to help his American counterpart remain on the gold standard, yet he made no progress when he attempted to persuade Hoover to scale down French war debts. Only Congress could do that, Hoover explained, and France could better afford to pay than any other nation. Hoover pressed for disarmament, but Laval ruled that out unless the United States would sign an alliance with France. Hoover responded that alliances do not prevent wars; they merely expand their size when wars erupt. When Laval departed, the leaders knew what to expect. They liked and respected each other and understood the political realities in France and America. Yet neither side would budge much until the Second World War was imminent. On October 26, Laval returned to New York, where Al Smith escorted him to the top of the Empire State Building. The Laval visit was long on symbolism and ceremony and short on substance, but it bolstered Laval’s image at home and somewhat reassured Hoover that Laval would stand fast with him on gold.32
While Hoover attempted to resolve economic and political problems in Europe, the vast Pacific was erupting into violence. The conflict had started decades earlier in Manchuria, a semiautonomous province claimed by China, Russia, and Japan due to its rich resources and potential for expansion and economic development. In September 1931, Japan occupied the key city of Mukden after claiming that the Chinese had planted explosives that destroyed a portion of the South Manchurian Railroad, vital to the Japanese. The incident was clearly a Japanese hoax; shortly after the purported blast, an engine and railroad cars safely traversed the purported gap created by the explosion. But in the wake of the phony sabotage, Japan began expanding throughout Manchuria. The League of Nations investigated the supposed bombing, deliberated, and debated. Secretary Stimson, backed by Hoover, argued that Japan’s aggression violated the League Covenant, as well as the 1922 Nine-Power Treaty signed at Washington whereby the Pacific powers guaranteed the territorial integrity of China. Japan had also violated the 1928 Kellogg-Briand Pact, which outlawed war as an instrument of national policy.33
Opposed to the belligerence but aware that provocation might invite war, the president instructed Stimson to issue a statement condemning the Japanese for their violation of international law. Hoover hoped the stigma of international opinion might
be sufficient to deter further aggression. Stimson fleshed out Hoover’s idea, adding language threatening economic sanctions. The president overruled Stimson and edited out the veiled threat, believing sanctions were more likely to lead to war than to preserve the peace, a scenario that transpired under his successor. America had no vital interests in the Far East, Hoover explained, and the military was not certain it could win a land war on the Asian continent, nor win a naval conflict in less than five years. The hand that pointed a pistol, Hoover advised Stimson, must be prepared to pull the trigger.34
Stimson’s note, which was dispatched on January 7, 1932, and published the next day, did include a new wrinkle. What became known as the Stimson Doctrine stated that the United States would deny diplomatic recognition to any territory seized by force. Yet the declaration had no discernable effect on the Japanese, nor did world opinion deter the island nation from further conquests. The fighting soon accelerated, and Japan created the puppet state of Manchukuo in Manchuria as a Japanese-dominated province. Further, the island warriors carried the war beyond Manchuria, bombarding Shanghai, the first civilian bombing of World War II. The incursion at Shanghai alarmed the Western powers, most of them imperialists themselves. There was a large foreign settlement at Shanghai and the British had more than $1 billion invested there. Meanwhile, the League of Nations was moving on the diplomatic front. With the permission of both the Japanese and the Chinese—in fact, the Japanese had initiated the idea—the League created a fact-finding mission. The chief defense of the Japanese, which had some validity despite its underlying imperialistic motivation, was that China was not a nation in the modern sense but a conglomeration of warlords constantly slaying their own people, who could not protect property such as the crucial South Manchurian Railroad. The Lytton Commission investigation dragged on until February 1933, when it issued a report condemning the Japanese as aggressors, a predictable conclusion. Japan responded by withdrawing from the League. Japan pulled out of Shanghai but maintained a viselike grip on Manchuria. The League, and the United States, had proven impotent, and their denunciations only hardened the Japanese, though it stigmatized and isolated them. Yet in practical terms, the real estate of China would have swallowed would-be protectors just as it would have engulfed the Japanese, who would have become acculturated. The story of Manchuria and the Stimson Doctrine became a sad one after hindsight of the endgame lay in focus. Yet, ironically, once his long career ended, Stimson considered the volleys of words he fired against the invaders of Manchuria his greatest diplomatic accomplishment.35
TEN
Fighting the Depression
As the 72nd Congress opened, both parties looked forward to the 1932 presidential elections. The outcome of the 1930 congressional elections made it more difficult to blame Hoover for the deepening Depression. After deaths and subsequent new elections in some districts, the Democrats ended up with a slim majority in the House, which enabled them to elect as Speaker John Nance Garner of Texas. The Republicans organized the Senate with a bare majority after a long standoff during which Progressive Republicans divided their votes to prevent any candidate from receiving a majority. Finally, Bertrand Snell of New York was elected to lead the upper house, defeating John Q. Tilson of Connecticut. The Democrats approached the session without a single national spokesman and with no leader by consensus. They decided to wait for Hoover to propose legislation and then to caucus over how to respond. Both houses were splintered, as in the previous, 71st, Congress, by a bloc of mostly Western mavericks who called themselves Progressives, yet, lacking a national program, were more appropriately insurgents, concerned primarily with protecting the interests of their agricultural constituents. They often voted with the Democrats. Divided government during the course of the worst depression in the nation’s history left each party chained by the idiosyncrasies of the other. The chief imbroglio arose over whom to blame if legislation stagnated, which, in fact, it did not, at least not to the degree expected. The Democrats walked a tenuous tightwire; they did not want the Depression to end on Hoover’s watch; but neither did they want to be so obviously obstructionist as to receive blame themselves. The Democrats struck a wildcat well of ready cash, but it spurted from a single source: the party’s national chairman, John J. Raskob, chief owner of General Motors, who financed the Democrats almost single-handedly and thereby gained a dominant role in determining policy and candidates. Not since Mark Hanna bankrolled William McKinley had a business magnate bet his fortune on politics.1
The 72nd Congress marked the second phase in Hoover’s war on the Depression, and he took the offensive with the most ambitious legislative agenda of any president to that time. He also grew far more assertive in pushing through his unified, integrated, holistic healing balm to the economic infection. From beginning to end, he strove to dispose as well as to propose, talking regularly with influential congressmen, the GOP National Committee, and anyone who might pave the highway to passage, including members of the opposition. He did not dislike Garner, and they struck a number of deals, although he did not entirely trust him either, especially because the Texan coveted his party’s presidential nomination. Garner usually limited his interference with Hoover’s bills to amending or delaying them, not defeating them outright. He was a savvy politician with no inclination to damage his own presidential aspirations. Congress did not assemble until December 8, for Hoover’s State of the Union address, and then the chief executive bombarded it with a succession of subsequent messages on specialized topics including the budget, foreign relations, law enforcement, and reorganization of government. All speeches were read to joint sessions by the House clerk, as was the tradition at that time, and then congressmen were given printed copies. Thus, the formal reading of the messages was less important than the study of the content by the legislators in their offices. During the formal reading they lolled in the lobby or cloakroom, where they smoked, gossiped, and occasionally commented on the task ahead. Some were intimidated, or at least made uneasy, by the fusillade of legislation and its scope. The Republican insurgents wanted Hoover to spend more, especially on agriculture, while most Democrats wanted less spending.2
The president was both a fiscalist, who wanted to expand the money supply, and a monetarist, who wanted to increase spending via public works. While Hoover had severe reservations about opening the Pandora’s box of insatiable demand and limited supply that outright doles would create, he had no reservations about work relief on a larger scale than had ever been attempted. The centerpiece of his economic program was the Reconstruction Finance Corporation (RFC), a government corporation for loaning money to banks, businesses, and railroads to prevent failures and stimulate trade and commerce, especially construction. Before Congress convened, the president had experimented with the National Credit Corporation, a fund of $500 million, which he prodded large private banks to create, to be made available to prop up weaker, smaller banks in danger of being swept away by the undertow of bank failures. The venture failed for several reasons. The fund was too small to make a major impact, and the bankers were wary of risking their own liquidity by making loans to failing banks. The proposed RFC was more expansive and more expensive, had the weight of the government behind it, and went far beyond the mission of bolstering banks. It remained an integral fixture in the American economy throughout the subsequent New Deal era. The RFC also had antecedents in the War Finance Corporation of World War I, created by the Wilson administration to help stimulate war production. It was resurrected briefly during the Harding recession of 1921–22.3
Second on the president’s agenda was the Glass-Steagall Act. Its chief purposes were to save the gold standard, stabilize exchange rates, maintain wages, and increase the money supply, because only gold-backed dollars could circulate. The gold standard was severely stressed. Hoover instructed the Treasury to pay gold for currency, as required by law, and the precious metal was simultaneously depleted by foreign creditors and by Americans, who consequently ho
arded it, diminishing money in circulation. The chief executive could not reveal at the time how close the nation was to defaulting on the gold standard, for fear of inciting panic. The mechanism by which the legislation worked was relatively simple, at least superficially. It permitted a portion of paper currency to be backed by certain types of Federal Reserve notes, in essence expanding the supply of gold. The psychology, given the circumstances, was providential. All the Hoover economic proposals were like interlocking puzzle pieces. The chief executive asked for a system of home loan discount banks to save homes from foreclosure and for additional capital to fund federal land banks to make low-interest loans available to farmers. He called for reorganization of failing railroads, legislation to reorganize the executive branch, and authority to lease Muscle Shoals for private development to revitalize the region. The Chief wanted to be frugal and called for a moderate tax increase to bring the soaring deficit under control, though he was willing to tolerate modest deficits. He requested legislation to make assets of closed banks available to depositors and for the legalization of branch banking. The Chief requested a widespread program of public works to be spread throughout the country, strategically placed where unemployment was greatest. He said he would follow up by designating specific public works. He also called for increased restrictions on immigration to save jobs for Americans and for labor legislation that would prohibit the use of injunctions to outlaw strikes. No one else in either party proposed such a sweeping program. There was urgency in the president’s series of messages. There were some things he cautioned against: no direct doles, no general revision of the tariff, no further benefits to veterans, and no repeal of antitrust laws.4