1. Chapter 32 The Politics of Boom and Bust, 1920–1932

2. I. The Republican “Old Guard” Returns Warren G. Harding, inaugurated in 1921, looked presidential: – Found himself beyond his depth in the presidency He was unable to detect moral halitosis in his evil associates He could not say no and designing politicians leeched on to this weakness Washington could not tell a lie, Harding could not tell a liar He promised to gather around him the “best minds” of the party

3. I. The Republican “Old Guard” Returns Harding’s “best minds”: – Charles Evans Hughes: Masterful, imperious, incisive, brilliant Brought to the position of secretary of state a dominating conservative leadership – Andrew W. Mellon: New secretary of the Treasury – Herbert Hoover: Famed feeder of the Belgians and wartime food administrator Became secretary of commerce

4. I. The Republican “Old Guard” Returns Raised his second-rate cabinet to first-rate importance Especially in drumming up foreign trade for US. manufactures. Harding’s “worst minds”: – Senator Albert B. Fall: A scheming anticonservationist Appointed secretary of the interior As guardian of the nation’s natural resources, he resembled the wolf hired to protect the sheep

5. I. The Republican “Old Guard Returns – Harry M. Daugherty: A big-time crook in the “Ohio Gang” Was supposed to prosecute wrongdoers as attorney general.

6. II. GOP Reaction at the Throttle Harding was a perfect “front” for enterprising industrialists: – New Old Guards: Hoped to crush the reforms of the progressive era Hoped to improve on the old business doctrine of laissez-faire They simply wanted the government to keep its hands off business, But for the government to guide business along the path to profits – They achieved their purpose by putting the courts and administrative bureaus in safekeeping of fellow stand- patters

7. II. GOP Reaction at the Throttle (cont.) – Harding lived less than three years as president: But appointed four of the nine justices: His fortunate choice for chief justice was ex-president Taft, who performed his duties ably but was more liberal than some of his cautious associates – The Supreme Court axed progressive legislation: It killed a federal child-labor law Stripped away many of labor’s hard-won gains Rigidly restricted government intervention in the economy

8. II. GOP Reaction at the Throttle (cont.) Landmark case Adkins v. Children’s Hospital (1923): – It reversed its own reasoning in Muller v. Oregon (see p. 645): » Which declared women to be deserving of special protection in the workplace » And invalidated a minimum-wage law for women » Reasoning: because women now had the vote (19 th Amendment), they were the legal equal of men and could no longer be protected by special legislation. – These two cases framed a debate over gender differences: » Were women sufficiently different from men that they merited special legal and social treatment? » Or were they effectively equal in the eyes of the law and undeserving of special protections and preferences?

9. “It would need more than the Nineteenth Amendment to convince me that there are no differences between men and women, or that legislation cannot take those differences into account.” ~ Oliver Wendell Holmes Dissenting in Adkins

10. II. GOP Reaction at the Throttle (cont.) – Corporations could once more relax and expand: Antitrust laws were often ignored, circumvented, or feebly enforced by friendly prosecutors The Interstate Commerce Commission came to be dominated by men who were personally sympathetic to the managers of the railroads Big industrialists strived to reduce the rigors of competition – So, competition is good? Associations that ran counter to the spirit of existing antitrust legislation, their formation was encouraged by Hoover

11. II. GOP Reaction at the Throttle (cont.) Hoover’s efficiency: – Led him to condemn the waste resulting from cutthroat competition So, competition is bad? So, competition is bad? – His commitment to voluntary cooperation led him to urge businesses to regulate themselves rather than be regulated by big government.

12. Left to right, inventors and magnates Henry Ford and Thomas Edison, President of the United States Warren G. Harding, and tire manufacturer Harvey S. Firestone, 1921.

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14. III. The Aftermath of War Wartime government controls on the economy were swiftly dismantled: – The War Industries Board disappeared With its passing, progressive hopes for more government regulation of big business evaporated – Returned railroads to private management in 1920 Some hoped for permanent nationalization – And this would have been “reform”? Congress passed Esch-Cummins Transportation Act: – Encouraged private consolidation of the railroads

15. III. The Aftermath of War (cont.) – Pledged the Interstate Commerce Commission to guarantee their profitability – New philosophy was to save the railroads from the country. – Government tried to get out of the shipping business: – The Merchant Marine Act (1920) authorized the Shipping Board to dispose of much of the hastily built wartime fleet – The Board operated the remaining vessels without conspicuous success – Under the La Follette Act (1915), American shipping could not thrive in competition with foreigners.

16. III. The Aftermath of War (cont.) Labor limped along badly in the postwar decade, lack of government support: – Bloody strike in the steel industry in 1919 – The Railway Labor Board ordered a wage cut of 12% in 1922 Attorneyobtained against the strike Attorney General Daugherty obtained an injunction against the strike – Needy veterans reaped lasting gains from the war: Congress (1912) created the Veterans Bureau to operate hospitals and provide vocational rehab.

17. III. The Aftermath of War (cont.) Veterans organized into pressure groups The American Legion was distinguished for its militant patriotism, rock-ribbed conservatism, and zealous antiradicalism. Aggressive for veterans’ benefit Critics denounced a holdup “bonus” for the millions of veterans Won in 1924 the passage of the Adjusted Compensation Act: – Gave former soldiers a paid-up insurance policy due in 20 years – Adding $3.5 billion to the cost of the war

18. IV. America Seeks Benefits Without Burdens Making peace with the fallen foe: – The United States, having rejected the Treaty of Versailles, was technically at war with Germany, Austria, and Hungary: In July Congress passed a simple joint resolution that declared the war officially over Isolation was enthroned in Washington Continued to regard the League as an unclean thing Harding at first even refused to support the League’s world health program

19. IV. America Seeks Benefits Without Burdens – Secretary Hughes secured for American oil companies the right to share in oil exploitations – Disarmament was an issue for Harding: (What?) Had businessmen to finance the ambitious naval building program during the war (What?) “Businesspeople” were unwilling to pay taxes for a naval expansion (?) “Businesspeople” were unwilling to pay taxes for a naval expansion (?) – But such an expansion would have benefitted many of them! – And lower-income Americans WERE willing to pay higher taxes for such a purpose?

20. IV. America Seeks Benefits Without Burdens Disarmament was an issue for Harding: Disarmament was an issue for Harding: – Washington “Disarmament Conference” 1921- 1922: Invitations went out to all but Bolshevik Russia Invitations went out to all but Bolshevik Russia – Why mention this? Russia was in the midst of a civil war and had only a decrepit navy! The double agenda included unprecedented naval disarmament proposal: The double agenda included unprecedented naval disarmament proposal: – The situation in the Far East – Hughes proposed a ten-year “holiday” on the construction of battleships – He proposed scaled-down navies of America, Britain, and Japan at a ratio of 5:5:3.

21. IV. America Seeks Benefits Without Burdens – Washington “Disarmament Conference” 1921- 1922: Three Treaties – Five-Power Treaty included Hughes’ proposed ship ratios, with “1.7” ratios for France and Italy » Britain and U.S. to refrain from fortifying Pacific possessions —this would be addressed in a later treaty—London, 1930 » No restrictions placed on small warships—this would be addressed in a later treaty—London, 1930 – A Four-Power Treaty–the pact bound Britain, Japan, France and the United States to preserve the status quo in the Pacific —neither did the other powers » Congress made no commitment in Four-Power Treaty to use of armed force—neither did the other powers

22. IV. America Seeks Benefits Without Burdens Disarmament was an issue for Harding: Three Treaties – Gave China—“the Sick Man of the Far East”—the Nine-Power Treaty (1922), whose signatories agreed to nail wide-open the Open Door in China Five-Power Treaty was first arms-reduction treaty in world history Five-Power Treaty was first arms-reduction treaty in world history – May have prevented—in the words of British naval strategist Eric Grove—the “Great Anglo-American War of 1928”

23. IV. America Seeks Benefits Without Burdens Kellogg-Briand Pact: – Secretary of state Frank B. Kellogg won the Nobel Peace Prize for his role; Kellogg signed the Pact with the French foreign minister. – The new parchment peace was delusory: Defensive wars were still permitted The pact was a diplomatic derelict and virtually useless It reflected the American mind (1920s): – Willing to be lulled into a false sense of security isolationism – This same attitude showed up in the isolationism of the 1930s.

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25. Figure 32-1 p731 Limits imposed by the Washington Conference, 1921–1922. Note the 5:5:3:1.75:1.75 ratio on capital ships (battleships and battle cruisers), and the separate category for the relatively new type—aircraft carriers. This agreement prevented a naval arms race for 14 years, until Japan withdrew in 1936.

26. V. Hiking the Tariff Higher Businesspeople sought to keep the market to themselves by throwing up tariff walls: – Fordney-McCumber Tariff Law: raise Lobbyists wanted to raise the average from 27% to 38.5%, almost as high as Taft’s Payne Aldrich Tariff of 1909 (see Appendix.) Duties on farm produce were increased Flexibility: the president could increase or decrease duties as much as 50% Harding was more friendly to increases than reductions.

27. V. Hiking the Tariff Higher (cont.) In six years they authorized 32 upward charges During this same time, the White House ordered only 5 reductions – The high-tariff course set off a chain reaction: European producers felt the squeeze Impoverished Europe needed to sell its manufactured goods to the United States America needed to give foreign countries a chance to make a profit International trade, Americans were slow to learn, is a two-way street.

28. V. Hiking the Tariff Higher (cont.) They could not sell to others in quantity unless they bought from them in quantity—or lent them more U.S. dollars Erecting tariff walls was a game that two could play The whole European-American tariff situation further deepened the international economic distress, providing one more rung on the ladder by which Adolf Hitler scrambled to power. Is this whole situation reminiscent of the period of mercantilism? Is this whole situation reminiscent of the period of mercantilism?

29. VI. The Stench of Scandal Loose morality and get-rich-quickism of the Harding era resulted in a series of scandals: – Scandals: 1923 Colonel Charles R. Forbes, caught with hand in the till, was forced to resign as head of the Veterans Bureau – Looted the government of $200 million, chiefly in the building of veterans’ hospitals – He was sentenced to two years in a federal penitentiary Teapot Dome scandal: – Involved priceless naval oil reserves at Teapot Dome (Wyoming) and Elk Hills (California)

30. VI. The Stench of Scandal (cont.) – Secretary of the interior Albert B. Fall induced his careless colleague, the secretary of the navy, to transfer these valuable properties to the Interior Department – Harding indiscreetly signed the secret order – Fall quietly leased the lands to oilmen Harry F. Sinclair and Edward L. Doheny, – But not until he received a bribe (“loan”) of $100,000 from Doheny and about three times that amount in all from Sinclair – Teapot Dome finally came to a whistling boil » Fall, Sinclair, and Doheny were indicated 1924 » Case dragged on until 1929 » Fall was found guilty of taking a bribe, sentenced to one year in jail

31. V. The Stench of Scandal (cont.) » The two bribe givers were acquitted while the bribe taker was convicted » Sinclair served several months in jail for having “shadowed” jurors and for refusing to testify before a Senate committee. – The acquittal of Sinclair and Doheny undermined faith in the courts. Scandal of Attorney General Daugherty: – A Senate investigation (1924) of illegal sale of pardons and liquor permits – Forced to resign, tried in 1927, but released after the jury twice failed to agree.

32. V. The Stench of Scandal (cont.) Harding was spared the full revelation of these iniquities: – He embarked on a speechmaking tour across the country all the way to Alaska On return he died in San Francisco on August 2, 1923 – The brutal fact is that Harding was not a strong enough man for the presidency as much He himself privately admitted as much – Such was his weakness that he tolerated people and conditions that subjected the Republic to its worst disgrace since the days of President Grant.

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34. VII. “Silent Cal” Coolidge Vice President Coolidge was sworn into office by his father: He embodied the New England virtues of honesty, morality, industry, and frugality He seemed to be a crystallization of the commonplace Had only mediocre powers of leadership His speeches were invariably boring True to Republican philosophy, he became the “high priest of the great god Business”

35. VII. “Silent Cal” Coolidge (cont.) His philosophy was a hands-off temperament His thrifty nature caused him to sympathize with Secretary of the Treasury Mellon’s effort to reduce taxes and debts Coolidge slowly gave the Harding regime a badly needed moral fumigation Coolidge was not touched by the scandals. – Was America’s moral sensibility being dulled by prosperity or by modernism? Or by both? Or by both? Or by something else altogether? Or by something else altogether?

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37. VIII. Frustrated Farmers Farmers in a boom-or-bust cycle in the post- war decade – Peace brought: End to government –guaranteed high prices and massive purchases by other nations Foreign production reentered the stream of world commerce – Machines: Threatened to plow the farmers under over their own overabundant crops

38. Case ca. 1910 Steam Tractor

39. 1925 John Deere Spoker D Tractor

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41. VIII. Frustrated Farmers (cont.) The gasoline-engine tractor was working a revolution on American farms: – They could grow bigger crops on larger areas – Improved efficiency and expanded agricultural acreage; helped to pile up more price-dampening surpluses – A withering depression swept through agricultural districts in the 1920s, when one farm in four was sold for debt or taxes. Schemes abounded for bringing relief to the hard- pressed farmers: – A bi-partisan “farm bloc” from the agricultural states coalesced in Congress in 1921 and succeeded in getting some helpful laws passed.

42. VIII. Frustrated Farmers (cont.) The Capper-Volstead Act: – Exempted farmers’ marketing cooperatives from antitrust prosecution The McNary-Haugen Bill (1924-1928): – Sought to keep agricultural prices high by authorizing the government to buy up surpluses and see them abroad – Government losses were to be made up by a special tax on the farmers – Congress twice passed the bill, – But frugal Coolidge twice vetoed it – Farm prices stayed down, and farmers’ political temper- atures stayed high, reaching a fever pitch in the election of 1924.

43. IX. A Three-Way Race for the White House in 1924 Election of 1924: – Nominated “Silent Cal” at their convention in Cleveland in the summer of 1924 – Democrats had more difficulty choosing a candidate in their convention in New York: The party was split between “wets” and “drys” Urbanites and farmers Fundamentalists and Modernists Northern liberals and southern stand-patters, immigrants and old-stock Americans.

44. IX. A Three-Way Race for the White House in 1924 The Democrats failed by one vote to pass a resolution condemning the Ku Klux Klan Deadlocked for an unprecedented 102 ballots, the convention turned to John W. Davis Now wide-open for a liberal candidate: – Senator Robert (“Fighting Bob”) La Follette sprang forth to lead a new Progressive party – He gained the endorsement of the American Federation of Labor – He enjoyed the support of the shrinking Socialist party, – But his majority constituency were the price-pinched farmers

45. IX. A Three-Way Race for the White House in 1924 – La Follette’s new Progressive party: Fielding only a presidential ticket, with no candidates for local office Proved only a shadow of the robust Progressive coalition of prewar days Its platform called for government ownership of railroads and relief for farmers It lashed out at monopoly and antilabor injunctions Urged a constitutional amendment to limit the Supreme Court’s power to invalidate laws passed by Congress.

46. IX. A Three-Way Race for the White House in 1924 Election returns: La Follette polled nearly 5 million votes “Cautious Cal” and the oil-smeared Republicans over- whelmed Davis, 15,718,211 to 8,385,283 The electoral count stood at 382 for Coolidge, 136 for Davis, and 13 for La Follette, all from his home state of Wisconsin (see Map 32.1)

47. Map 32-1 p736

48. X. Foreign-Policy Flounderings Isolation continued to reign in the Coolidge era: The Senate would not allow America to adhere to the World Court Coolidge only halfheartedly and unsuccessfully pursued further naval disarmament American outward looking: – The armed interventionism in the Caribbean and Central America – American troops were withdrawn (after an eight-year stay) from the Dominican Republic in 1924 – They remained in Haiti (1914-1934).

49. X. Foreign-Policy Flounderings (cont.) – America was in Nicaragua intermittently since 1909; Coolidge briefly removed them in 1925; in 1926 he sent them back where they stayed until 1933 – American oil companies clamored for a military expedition to Mexico in 1926 – Overshadowing all other foreign-policy problems in 1920s was the issue of international debts: Complicated tangle of private loans; Allied war debts and German reparations payments (see Figure 32.2) In 1914 America had been a debtor nation to the sum of $4 billion By 1922, it had become a creditor nation to the sum of $16 billion.

50. X. Foreign-Policy Flounderings (cont.) American investors loaned some $10 billion to foreigners in the 1920s The key knot in the debt tangle was the $10 billion that the U.S. Treasury had loaned to the Allies – Uncle Sam held their IOUs—and he wanted to be paid – The Allies protested that the demand for repayment was grossly unfair – The French and the British pointed out, with much justice, that they had held up a wall of flesh and bone against the common foe, until the Americans were ready to enter – America, they argued, they should write off its loans as war costs

51. X. Foreign-Policy Flounderings (cont.) – The real effect of their borrowed dollars had been to fuel the boom in the already roaring wartime economy in America, where nearly all the purchases had been made – Final straw, protested the Europeans, was that America’s postwar tariff walls made it almost impossible for them to sell their goods to earn the dollars to pay their debts.

52. Figure 32-2 p737

53. XI. Unraveling the Debt Knot Germany’s war debts: – America insisted on getting its money back – The French and British demanded $32 billion in reparations payments – The Allies hoped to settle their debt with the United States – Debt cancellations: Some statesmen wanted the debts to be scaled down or even canceled Calvin Coolidge turned aside any suggestions of debt cancellation.

54. XI. Unraveling the Debt Knot (cont.) The Dawes Plan (1924): Was largely negotiated by Charles Dawes, about to be Coolidge’s running mate It rescheduled German reparations payments And opened the way for further American private loans to Germany The whole financial cycle now became still more complicated: – As U.S. bankers loaned money to Germany, – Germany paid reparations to France and Britain, – And the former Allies paid war debts to the United States.

55. XI. Unraveling the Debt Knot (cont.) When that well dried up after the great crash of 1929, the jungle of international finance quickly turned into a desert President Herbert Hoover declared a one-year moratorium in 1931— – except “honest little Finland,” which struggled along making payments until the last of its debt was discharged in 1976 The United States never did get its money, but it harvested a bumper crop of ill will.

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57. “For six years that man has given me unsolicited advice— all of it bad.” ~Calvin Coolidge on Herbert Hoover, 1928

58. XII. The Triumph of Herbert Hoover, 1928 1928 presidential race: – Coolidge decided not to run again – Herbert Hoover became the candidate: Nominated on a platform of both prosperity and prohibition Hoover not really a continuation of Coolidge – Democrats nominated Alfred C. Smith “Al(cohol) Smith,” soakingly and drippingly “wet” when the country was devoted to the “noble experiment” of prohibition He seemed to be abrasively urban He was Roman Catholic

59. XII. The Triumph of Herbert Hoover – Radio played prominently in this campaign for the first time: It helped Hoover more than Smith Hoover decried un-American “socialism” And preached “rugged individualism” Only twice—one campaign speech and inaugural address Only twice—one campaign speech and inaugural address Never having been elected to public office, he was thin-skinned in the face of criticism He did not adapt readily to necessary give-and-take of political accommodation His real power lay in his integrity – His humanitarianism; his passion for assembling the facts

60. XII. The Triumph of Herbert Hoover – His efficiency – His talent for administration – His ability to inspire loyalty in close associates – They called him “the Chief.” He was the best businessperson’s candidate: – Self-made millionaire, he recoiled from anything suggesting socialism, paternalism, or “planned economy,” (only “some”?) – Yet as secretary of commerce, he had exhibited some (only “some”?) progressive instincts: » He endorsed labor unions » He supported federal regulation of the new radio broadcasting industry » He flirted with the idea of government-owned radio.

61. XII. The Triumph of Herbert Hoover – Indications of low-level campaigners: Religious bigotry against Smith’s Catholicism The White House would become a branch of the Vatican—complete with “Rum, Romanism, and Ruin” The South shied away from “city slicker” Al Smith – Election returns: Hoover triumphed in a landslide: He bagged 21,391,993 popular votes, to 15,016,169 for Smith Hoover electoral count of 444 to Smith’s 87. – Big Republican victory; Hoover swept five former Confederacy states and all Border States(see Map 32.2).

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63. Map 32-2 p739

65. XIII. President Hoover’s First Moves – Hoover’s administration’s responses to the unorganized wage earners and the disorganized farmers – The Agricultural Marketing Act (June 1929): Designed to help the farmers help themselves, largely through producers’ cooperatives It set up the Federal Farm Bureau with a revolving fund of ½ billion dollars at its disposal Money was lent generously to farm organizations seeking to buy, sell, and store agricultural surpluses.

66. XIII. President Hoover’s First Moves – In 1930 the Farm Board created: The Grain Stabilization Corporation and the Cotton Stabilization Corporation Primary goal to bolster sagging prices by buying up surpluses They were suffocated by an avalanche of farm produce – Hoover during the campaign promised to call Congress into session to bring about “limited” change in the tariff.

67. XIII. President Hoover’s First Moves The Hawley-Smoot Tariff (1930): – By the time it was through both houses of Congress: Turned out to be the highest protective tariff in the nation’s peacetime history The average duty on nonfree goods was raised from 38.5% to nearly 60% To angered foreigners, it was a blow below the trade belt – It seemed like a declaration of economic warfare on the entire outside world – It reversed a promising worldwide trend toward reasonable tariffs

68. XIII. President Hoover’s First Moves – It plunged both America and other nations deeper into the terrible depression that had already begun – It increased international financial chaos and forced the United States further into the bog of economic isolationism – And economic isolationism, both at home and abroad, was playing directly into the hands of a hate-filled German demagogue, Adolf Hitler.

69. XIV. The Great Crash Ends the Golden Twenties – The speculative bubble: Few people sensed that the permanent plateau of prosperity would soon break Prices on the stock exchange continued to spiral upward And created a fool’s paradise of paper profits There were a few prophets who tried to sound warnings – The catastrophic crash came in October 1929: —and the Fed had raised interest rates too! Partially caused by the British who raised interest rates—and the Fed had raised interest rates too!

70. XIV. The Great Crash Ends the Golden Twenties Foreign investors and wary domestic speculators began to dump their “insecurities” Tensions built up to the panicky Black Tuesday of October 29, 1929: – 16,410,030 shares of stocks were sold in a save-who-may scramble – Wall Street became a wailing wall as gloom and doom replaced boom – Suicides increased alarmingly – Losses in blue chips securities were unbelievable – By the end of 1929 stockholders lost $40 billion in paper values (see Figure 32.3).

71. Figure 32-3 p741

72. In greater detail... In greater detail... Stock Market Boom Stock Market Boom Feb ‘28 to Sep ‘29 Feb ‘28 to Sep ‘29 Peaked 3 Sep ‘29, then bumpy but downward Peaked 3 Sep ‘29, then bumpy but downward Decline accelerated into “Black Thursday,” 24 Oct Decline accelerated into “Black Thursday,” 24 Oct Record 12.9 million shares traded that day Record 12.9 million shares traded that day Bankers bought blue-chip stocks 25 Oct Bankers bought blue-chip stocks 25 Oct Temporarily stemmed declines Temporarily stemmed declines “Black Monday,” 28 Oct “Black Monday,” 28 Oct Record loss of 13% Record loss of 13% XIV. The Great Crash Ends the Golden Twenties

73. In greater detail...In greater detail... “Black Tuesday,” 29 October “Black Tuesday,” 29 October Record trading—16 million shares Record trading—16 million shares Loss of 12% Loss of 12% In 5 trading days, market had lost $30 billion In 5 trading days, market had lost $30 billion More than U.S. spent on WWI More than U.S. spent on WWI 10 times the annual federal budget 10 times the annual federal budget Interim bottom 13 Nov Interim bottom 13 Nov Then several months of recovery, peaking mid-Apr ‘30 at late-‘29 level Then several months of recovery, peaking mid-Apr ‘30 at late-‘29 level XIV. The Great Crash Ends the Golden Twenties

74. There was an interim bottom on 13 Nov 1929, then several months of recovery, peaking in mid-April 1930 at middle-of-the-crash level. Some economists call this a “dead-cat bounce.” The decline then began anew.

75. The next bottom was 8 Jul 1932, at an 89% drop from the peak of 3 Sep 1929. It was the lowest level of 20th century. It did not return to pre- crash levels until the mid-1950s. The Stock Market crash did not directly cause the Great Depression, but it undermined confidence in other areas of the economy.

76. XIV. The Great Crash Ends the Golden Twenties The stock-market collapse heralded a business depression: – At home and abroad – The most prolonged and prostrating in American or world experience – No other industrialized nation suffered so severely – End of 1929: 4 million workers were jobless – Two years later the figure had about doubled – Hungry and despairing workers pounded the pavements in search of work – The misery and gloom was incalculable – Over 5000 banks collapsed in the first three years – Carrying down with them the savings of tens of thousands of ordinary citizens.

77. XIV. The Great Crash Ends the Golden Twenties – Countless thousands lost their home and farms to foreclosure – Breadlines formed, soup kitchens dispensed food – Families felt the stress, as jobless fathers nursed their guilt and shame at not being able to provide for their families – Breadless breadwinners blamed themselves for their plight – Mothers nursed fewer babies.

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80. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Overproduction: Both farm and factory The depression of the 1930s was one of abundance, not want – Not surprising—scarcity of goods would cause demand to increase—hardly the situation causing a depression It was the “great glut” or the “plague of plenty” The nation’s ability to produce goods had clearly outrun its capacity to consume or pay for them – Perhaps not so “clearly” – Perhaps Fed’s belated tightening of credit was to blame

81. XV. Hooked on the Horn of Plenty What caused the Great Depression? – “Maldistribution” of Wealth: Too much money was going into the hands of the wealthy: – Who in turn invested it in factories and other agencies of production. – Nothing going into salaries and wages revitalizing purchasing power. – Only Marxist economists see this as a significant cause – How about Federal Reserve Policy? Monetarists consider it the prime cause of the Depression Monetarists consider it the prime cause of the Depression – Not understood or even mentioned by most historians

82. XV. Hooked on the Horn of Plenty What caused the Great Depression? – How about Federal Reserve Policy? Fed policy caused 35% contraction in money supply, 1929-33 Fed policy caused 35% contraction in money supply, 1929-33 – Also caused failure of 33% of American banks – Caused recession that should have ended in 1930-31 to become the Great Depression, and last until the start of WWII in Europe Fed failed despite the presence of many who understood what was the correct policy to take Fed failed despite the presence of many who understood what was the correct policy to take See “Milton Friedman: The Great Depression Myth” See “Milton Friedman: The Great Depression Myth”“Milton Friedman: The Great Depression Myth”“Milton Friedman: The Great Depression Myth” – “Government has better press agents than free enterprise”

83. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Overexpansion: Of credit through installment-plan buying; overstimulated production – No—the overexpansion of credit had been caused by the Federal Reserve from 1921 to 1928 Normal technological unemployment – Lack of diversification in the economy – Decline in exports Exacerbated by the Fortney-McCumber and Hawley- Smoot tariffs Exacerbated by the Fortney-McCumber and Hawley- Smoot tariffs

84. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Banking Collapse Followed stock market crash Followed stock market crash Three waves: 1930-33 Three waves: 1930-33 Triggered contraction of money supply Triggered contraction of money supply Federal Reserve Board’s response Federal Reserve Board’s response Raise interest rates in effort to protect its own solvency Raise interest rates in effort to protect its own solvency – Turned a significant contraction into a severe one

85. On 10 December 1930, crowds lined up in the rain outside the Bronx Branch of the Bank of the United States in New York to withdraw their deposits. This was the start of the bank run that is generally considered to have caused the Great Depression. Of the 608 bank failures of late 1930, the Bank of the United States accounted for 1/3 of the $550 million in deposits lost.

86. This is 79 Delancey Street, New York City. In 1930, it served as the headquarters of the Bank of the United States, which might be considered “Ground Zero” of the Great Depression. The building just to the left is labeled “Tenement Museum.”

87. 1254 Southern Blvd., New York, modest site of what was the Bronx branch of the Bank of the United States in 1930. A run on this branch is often seen as the event that triggered the Great Depression.

88. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Economic anemia abroad: Britain and the Continent had never fully recovered A chain-reaction financial collapse in Europe A drying up of international trade European uncertainties over reparations, war debts, and defaults on loans owed to America. – Uncertainty? We had made it clear that we were not going to forgive debts and the Dawes Plan had made it possible for them to continue to repay them Many of these conditions had been caused by Uncle Sam’s own narrow-visioned policies.

89. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Theories—Two Main Points of View Demand-driven: Keynesian; Institutional Demand-driven: Keynesian; Institutional – Widespread loss of confidence led to underconsumption – Financial crisis following 1929 crash led to sudden and persistent drop in consumption and investment spending – Once panic and deflation set in, many believed they could make more money by keeping clear of the markets – Holding money became profitable as prices got ever-lower and a given amount of money bought ever more goods – Textbook’s explanations are largely Keynesian

90. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Theories—Two Main Points of View Monetarist Monetarist – Great Depression started as ordinary recession – Significant policy errors—most by Federal Reserve—caused shrinking of money supply, exacerbating economic difficulty, causing recession to deepen into Great Depression – “Debt deflation” caused borrowers to owe ever-more in real terms

91. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Theories—Expectations hypothesis New neoclassical synthesis New neoclassical synthesis – Both collapse and recovery were due largely to public expectations – After years of deflation and recession, important economic indicators turned positive just as Roosevelt took office – Before March 1933 people expected a further deflation and recession, but when Roosevelt announced major changes people began to expect inflation and economic expansion – Expectation of higher future income and higher future inflation stimulated demand and investments – Shift in expectations accounts for 70–80% of the recovery from 1933 to 1937

92. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Theories—Heterodox “Austrian School” includes F.A. Hayek and Murray Rothbard “Austrian School” includes F.A. Hayek and Murray Rothbard – Key cause of the Depression was Fed’s expansion of money supply in 1920s that led to unsustainable credit-driven boom in both stocks/bonds and capital goods – By time Fed belatedly tightened (1928), it was far too late— depression was inevitable – Artificial interference in economy was disaster prior to the Depression; government efforts to prop up the economy after the crash of 1929 only made things worse

93. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Theories—Heterodox Marxist Marxist – Capitalism creates unbalanced accumulations of wealth, leading to overaccumulations of capital and repeating cycle of devaluations through economic crises – Recession and depression are unavoidable under free- market capitalism – Common theme: free markets/capitalism bad; government planning/socialism good – Influenced both Hoover and advisors of Roosevelt

94. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Debt deflation Debt deflation – Overindebtedness and debt, caused by loose credit – Loose credit led to margin buying on stock market, leading to margin calls when stock prices dipped, leading to bank failures – Bank failures led to loss of billions of dollars in assets – Outstanding debts became heavier as prices and incomes fell by 20-50% – Bank failures snowballed as bankers called in loans which borrowers did not have money to repay – Capital investment and construction slowed to a halt as future prospects looked poor

95. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Non-debt deflation Non-debt deflation – Had been occurring since late 19 th century – Possible correction to sharp inflation of WWI era – Oil prices reached all time low in early 1930s as East Texas Oil Field began production

96. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Productivity shock Productivity shock – 1900-1930, capital investment and economic output surged with electrification, mass-production, and motorization – Resulting growth in productivity created excess production capacity – As prices fell, numerous plants closed – Increased mechanization and improvements in fertilizers caused drop in agricultural product prices

97. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Disparities of wealth and income (argued by many of FDR’s advisors) Disparities of wealth and income (argued by many of FDR’s advisors) – Economy produced more goods than consumers could purchase – Global overinvestment along with wages and earnings not keeping pace with productivity increases – Taxing the rich was the solution – Emphasized by Marxists and socialists

98. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Gold standard Gold standard – Most Western nations returned to gold standard after WWI, at the prewar gold price – Resulting deflationary pressure—coming immediately after severe wartime inflation—ground away at health of many European economies – The initial destabilizing shock was the Wall Street Crash, but gold-standard system transmitted the problem to the rest of the world

99. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Financial institution structures Financial institution structures – Bank failures played a huge role – Many rural banks were already failing in the 1920s due to over-mortgaged farms and falling commodity prices – Urban banks were also vulnerable to a shock—many of the largest in New York had large loans out to Germany and Latin America, were unprepared for the shock of a recession – Stock crash caused the Depression by destroying expectations and removing large sums of investment capital, OR economy was already slipping and stock crash just ratified it, OR stock market crash was not sufficient and other factors had to be in play

100. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Protectionism Protectionism – Actions such as the Smoot–Hawley Tariff Act helped cause the Depression, with other countries enacting protectionist policies in return – Smoot–Hawley was especially harmful to agriculture because it caused farmers to default on their loans – This may have worsened or even caused the ensuing bank runs in the Midwest and West that caused the collapse of the banking system – A petition signed by over 1,000 economists was presented to the U.S. government warning that the Smoot-Hawley Tariff Act would bring disastrous economic repercussions, to no avail

101. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause International debt structure International debt structure – WWI debtor nations put strong pressure on the U.S. in the 1920s to forgive or reduce the debts, but the American government refused – Instead, U.S. banks began making large loans to the nations of Europe, so debts and reparations were being paid only by piling up new debts – After the U.S. economy began to weaken, European nations found it much more difficult to borrow money from the U.S. – Meanwhile, high U.S. tariffs made it much more difficult for them to sell their goods in U.S. markets – Without any source of revenue from foreign exchange to repay their loans, they began to default

102. XV. Hooked on the Horn of Plenty What caused the Great Depression? – Specific theories of cause Population dynamics Population dynamics – Population growth rate decreased due to lower birth rate (since 1910) and decreased immigration (due to restrictions), causing reduced demand for goods and housing construction

103. – “What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy— beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot- Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar- thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929.” – The Wall Street Journal, 4 Nov 2008

104. XV. Hooked on the Horn of Plenty America’s “uniqueness” no longer seemed so unique, nor its Manifest Destiny so manifest: – The depression was a baffling wraith that Americans could not grasp – Initiative and self-respect were stifled by the Democrats – Many slept in tin-and-paper shantytowns cynically named Hoovervilles by the Democrats – The very foundations of America’s social and political structure trembled.

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106. XVI. Rugged Times for Rugged Individualists Hoover’s exalted reputation as a wonder- worker and efficiency engineer crashed – He would have shined in the prosperity- drenched Coolidge years – Now the Great Depression proved to be a task beyond his engineering talents He was distressed by the widespread misery As a “rugged individualist” he shrank from the heresy of government handouts. – He only mentioned “rugged individualism” twice in public, both times before the 1929 Stock Market Crash

107. XVI. Rugged Times for Rugged Individualists – He was convinced that industry, thrift, and self- reliance were the virtues that made America great He feared that a government doling out doles would weaken, perhaps destroy, the national fiber Relief by local government agencies broke down Hoover finally had to reluctantly turn from his doctrine of log-cabin individualism – No—Hoover was a moderate Progressive from the start And accept the proposition that the welfare of the people in a national catastrophe is a direct concern of the national government.

108. XVI. Rugged Times for Rugged Individualists He worked out a compromise between – The old hands-off philosophy – And the “soul-destroying” direct dole then being used in England. – He would assist the hard-pressed railroads, banks, and rural credit corporation » That if financial health were restored at the top of the economic pyramid: » Unemployment would be relieved at the bottom on a trickle-down basis. – Partisan critics sneered at the “Great Humanitarian”:

109. XVI. Rugged Times for Rugged Individualism – Most of the criticism of Hoover was unfair: His efforts probably prevented a more serious collapse – Or, did they possibly worsen, deepen the depression, and slow the recovery? His expenditures for relief, revolutionary for the day, paved the path for the enormous federal outlays of his New Deal successor, Franklin Roosevelt. – Who would spend 8 years doing even more of the same, also without ending the depression So, was the criticism that he wasn’t doing enough unfair, when perhaps he really was doing too much? So, was the criticism that he wasn’t doing enough unfair, when perhaps he really was doing too much?

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111. Chronicles of the Great Depression “Brother, Can You Spare a Dime?” “Brother, Can You Spare a Dime?” “Which Side Are You On?” “Which Side Are You On?” “Talking Dustbowl Blues” “Talking Dustbowl Blues”

112. XVII. Hoover Battles the Great Depression Hoover’s “trickle-down” philosophy: – He recommended that Congress vote immense sums for useful public works He secured from Congress appropriations totaling $2.25 billion for such projects Most imposing of the public enterprises was the gigantic Hoover Dam on the Colorado River created – It created a huge man-made lake for the purposes of irrigation, flood control, and electric power – He sternly fought all schemes that he thought were “socialistic.”

113. XVII. Hoover Battles the Great Depression Conspicuous was the Muscle Shoals Bill: – Designed to dam the Tennessee River – He vetoed this measure primarily because he opposed the government’s selling electricity in competition with its own citizens in private companies. – In 1932 Congress responded to Hoover’s appeal: Established the Reconstruction Finance Corporation (RFC): – It was designed to provide indirect relief – By assisting insurance companies, banks, agricultural organ- izations, railroads, and even hard-pressed state and local governments

114. XVI. Hoover Battles the Great Depression – But to preserve individualism and character, – There would be no loans to individuals. – The “pump-priming” loans were no doubt of widespread benefit – Projects that it supported were largely self-liquidating – The government profited to the tune of many millions of dollars – Giant corporations benefited The irony is that the thrifty and individualistic Hoover actually sponsored the project It actually had a strong New Dealish flavor. – No surprise! Hoover was a Progressive!

115. XVI. Hoover Battles the Great Depression Norris-La Guardia Anti-Injunction Act (1932): – It outlawed “yellow-dog” (antiunion) contracts – And forbade the federal courts to issue injunctions to restrain strikes, boycotts, and peaceful picketing. Hoover did inaugurate a significant new policy: By the end of his term he had started down the road toward government assistance for the needy citizens—a road that Franklin Roosevelt would travel much farther.

116. XVI. Hoover Battles the Great Depression Hoover’s woes: – Increased by a hostile Congress – The Republican majority proved highly uncooperative – After – After 1930, the Democrats controlled the House – Insurgent Republicans could—and did—combine with opposition Democrats to harass Hoover – Some of the president’s troubles were deliber- ately manufactured by Congress.

117. XVI. Hoover Battles the Great Depression The Austrian School’s critique: The Austrian School’s critique: – Hoover’s response to the Depression was to try to keep wages and profits high – The problem was overcapitalization of industry, caused by “easy-money” policies of the Federal Reserve in the 1920s Solution would have been to let overcapitalized businesses be liquidated Solution would have been to let overcapitalized businesses be liquidated Hoover’s policies propped up overcapitalized businesses, prolonging the problem Hoover’s policies propped up overcapitalized businesses, prolonging the problem

118. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.“ ~ Andrew Mellon as quoted by Herbert Hoover in his memoirs

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120. XVI. Hoover Battles the Great Depression Did Hoover not do enough? Did Hoover not do enough? – Or did he do too much? did he do too much?did he do too much?

121. Life went on.... The Bank of Manhattan Trust Building (now Trump Tower), located at 40 Wall Street, at 70 stories, 927 feet, opened in early May 1930, after only 11 months of construction. It was planned to be 135 feet taller than the nearby Woolworth Building, which was completed in 1913. Most importantly, it was designed to be two feet taller than the Chrysler Building's planned height of 925 feet. For less than a month, it was the tallest building in the world.

122. The Chrysler Building, the most stylish skyscraper in the world, opened on 27 May 1930. A 125’ spire secretly was assembled in the building's crown and hoisted into place, surpassing the Bank of Manhattan Trust Building and fulfilling owner Walter Chrysler's dream of owning the tallest building on Earth.

123. Life went on... 11 months after completion of the Chrysler Building, the Empire State Building opened as the world’s tallest building on 1 May 1931, just over 16 months after excavation of its site began.

124. Constructed at the start of the Great Depression, the iconic 102 story building was erected under the supervision of former Governor Al Smith, who had became president of Empire State Inc. after his failed White House bid against Herbert Hoover in 1928. The working-class former Governor, who had pulled himself up from his bootstraps, was bitter in defeat and was equally perturbed that Franklin Roosevelt, a blue blooded aristocrat, had squeaked by to become his successor as Governor of New York. Al Smith appeared to temporarily bury the hatchet when they both attended the ribbon cutting ceremony in 1931. There was an amusing moment when a member of the press shouted “Governor.” To which Smith replied, “Yes? Which one?”

125. “I most cordially congratulate you and your associates upon the completion of the Empire State Building and the opening of its doors to the service of the public. This achievement justifies pride of accomplishment in everyone who has had any part in its conception and construction and it must long remain one of the outstanding glories of a great city.” ~ Herbert Hoover 1 May 1931

126. Life went on... The RCA Building (30 Rockefeller Plaza) was completed in 1933, the year in which this picture was taken.

127. XVIII. Routing the Bonus Army in Washington Veterans of World War I were also hard-hit victims of the depression: Unwelcome “bonus” through the Hawley-Smoot Tariff What did the government owe them for their services in 1917-1918? Many veterans were prepared to go to Washington – To demand the immediate payment of their entire bonus – The “Bonus Expeditionary Force” (BEF), some 20,000, went to the capital summer of 1932 – They erected shacks on vacant lots—a gigantic “Hooverville” – After two were killed, Hoover ordered the army to evacuate the unwanted guests.

128. XVIII. Routing the Bonus Army in Washington – The Bonus Army: Led by General Douglas MacArthur With bayonets and tear gas And with far more severity than Hoover had planned The brutal episode brought down additional abuse on the once-popular Hoover. Were these bonuses the rewards that veterans had extorted from Congress earlier in this chapter? Were these bonuses the rewards that veterans had extorted from Congress earlier in this chapter? – The time was ripening for the Democratic Party—and Franklin D. Roosevelt—to cash in on Hoover’s calamities.

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130. XIX. Japanese Militarists Attack China Militaristic Japan stole the Far Eastern spotlight: In September, 1931 the Japanese imperialists lunged into Manchuria America had strong sentimental stake in China, but few significant economic interests – Americans stunned by this act of naked aggression – It was a flagrant violation of the League of Nations covenant – And other international agreements solemnly signed by Tokyo – Not to mention the American sense of fair play.

131. XIX. Japanese Militarists Attack China – Washington rebuffed initial attempts in 1931 to secure American cooperation in applying eco- nomic pressure on Japan – Washington and Secretary of State Henry L. Stimson decided to fire only paper bullets The so-called Stimson doctrine: – Proclaimed in 1932 – Declared that the United States would not recognize any territorial acquisitions achieved by force – Righteous indignation—or a preach-and-run policy—would substitute for solid initiatives.

132. XIX. Japanese Militarists Attack China – The verbal slap did not deter the march of the Japanese militarists: They bombed Shanghai in 1932 With shocking losses to civilians There was no real sentiment for armed intervention among depression-ridden Americans, who remained strongly isolationists during the 1930s – Collective security died and World War II was born in 1931 on the Manchuria plains. The Republic came closer to stepping into waters of internationalism than American prophets would dare to predict in the early 1920s.

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134. XX. Hoover Pioneers the Good Neighbor Policy Hoover and relations with America’s southern neighbors: – Hoover was interested in the often-troubled nations below the Rio Grande – After the stock market crash of 1929: Yankee economic imperialism became less popular Hoover became an advocate of international goodwill Strove to abandon the interventionist twist given by the Monroe Doctrine of Theodore Roosevelt

135. XX. Hoover Pioneers the Good Neighbor Policy forces – He negotiated a treaty with Haiti, later supplanted by an executive agreement, that provided withdrawal of American forces by 1934 – In 1933 the last marine “leathernecks” sailed away from Nicaragua after an almost continuous stay of some twenty years – Hoover, the engineer in politics, Happily engineered the foundation stone of the Good Neighbor policy; Upon them rose an imposing edifice in the days of his successor, Franklin Roosevelt.

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