Article — From the July 2009 issue

Barack Hoover Obama

The best and the brightest blow it again

( 3 of 6 )

Genius got its chance less than eight months after Hoover was sworn in, when the stock market collapsed. At the time, such an event wasn’t seen as having anything much to do with the president. Wall Street crashes happened every five to ten years in the old American economy, and it was understood that these crashes would sometimes start nationwide recessions. They might last a year or two, like the recession that started in 1920, or for much longer, like the devastating depression that began in 1873 and, according to some economists, didn’t really end until 1897. How long would it take to recover from the crash of ’29? Who could know? Mere politicians were supposed to leave the outcome to the workings of the market. But Hoover—much like Obama—plunged right in, with a response that was designed to rise above old ideological battles and effect a new partnership between the public and private sectors. Less than a month after the Wall Street crash, he began what would be weeks of meetings at the White House with hundreds of “key men” from the business world. There the president briefed them on everything he had done so far and urged them to cut as few jobs as possible for the duration of the slump. He also encouraged public and private construction projects, signed bills recognizing the right of unions to organize, and used the fledgling Federal Reserve both to ease credit and to discourage banks from calling in their stock-market loans.

All of these projects were anathema to old-line conservatives in Hoover’s own party, such as Andrew Mellon, the tax-slashing secretary of the treasury throughout the go-go years of the 1920s boom, who offered the president the absurdist advice to let the market “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Cutting one of the main ties to the trickle-down wisdom of what was suddenly a previous era, Hoover eventually shipped Mellon off to serve as ambassador to England.

Yet there remained little immediate action that the president could take, hobbled as he was by the limits of a federal government that made up less than 4 percent of the GDP and by the reluctance of those around him to interfere in any way with the sanctity of the markets. At what John Kenneth Galbraith would later skewer as “no-business” meetings, the key men of industry pledged their full support, then went home to slash wages and cut as many jobs as they could. By the end of 1930, the gross national product had dropped by nearly 13 percent, unemployment had shot up to nearly 9 percent, and over 600 banks had closed. The Democrats won a majority in the House of Representatives, but the primary response to the Depression offered by their laconic speaker, “Cactus Jack” Garner, was a national sales tax designed to balance the budget. Liberal legislators in both parties were more sympathetic, but they wielded little power.

As the Depression spread around the world, Hoover—like Obama—towered above the squabbling, suspicious leaders of Europe as well. Only Hoover, who had lived all around the world (like Obama) and also been part of the U.S. delegation at Versailles, seemed to understand the true threat the Depression posed to the global economy. Democratic forms of government were under assault everywhere in the West, and especially in the Weimar Republic, still staggering under the indemnity the victorious Allies had imposed on Germany in 1919. Hoover sought to alleviate the growing world credit crunch by pushing through a moratorium on the repayment of Europe’s considerable war debt to the United States—on the condition that the Allies also forgave Germany its indemnity. It was an example of statesmanship at its most enlightened, and if any single U.S. action at the time could have prevented the rise of the Nazis to power, this would have been it.

Back on the domestic front, Hoover tried to organize national, voluntary efforts to hire the unemployed, provide charity, and create a private banking pool. When these efforts collapsed or fell short, he started a dozen Home Loan Discount Banks to help individuals refinance their mortgages and save their homes, and created an unprecedented government entity called the Reconstruction Finance Corporation. Authorized to spend up to the then-astonishing sum of $2 billion, the RFC was a direct rebuttal to Andrew Mellon’s prescription of creative destruction. Rather than liquidating banks, railroads, and agricultural cooperatives, the RFC would lend them money to stay afloat.

Hoover, as the historian David M. Kennedy writes, had shown “himself capable of the most pragmatic, far-reaching, economic heterodoxy,” a trait that “would in the end carry him and the country into uncharted economic and political territory.” New Dealer Rexford Tugwell would, many years later, claim that “practically the whole New Deal was extrapolated from programs that Hoover started.” Indeed, “Hoover had wanted—and had said clearly enough that he wanted—nearly all the changes now brought under the New Deal label.”

Tugwell’s appraisal, though considerably exaggerated, nonetheless testifies to the boldness of Hoover’s program. The only problem was that it did not work. The nation’s credit system still would not thaw, banks kept falling like dominoes, unemployment rates and human suffering continued to rise. For all of his willingness to break with precedent and intervene directly in the economy, Hoover remained unable to turn his back fully on what Kennedy describes as the prevailing “legacy of perception and understanding of economic theory.”

As Europe faltered, for instance, foreign gold began to flow out of America’s banks and back home. Hoover reacted by increasing interest rates and raising taxes, in an effort to further deflate the economy, balance the federal budget, and thereby lure the gold back. This was the textbook economic response of the time to fleeing gold reserves; in the midst of the Great Depression, it was a disaster.

Meanwhile, the RFC was derided by populist critics as “bank relief” and “a millionaire’s dole”—criticisms echoed today by all those who see George W. Bush’s Troubled Asset Relief Program and Obama’s own Public-Private Investment Program as outrageous giveaways. And, as Kennedy points out, once Hoover had set in motion the great bank bailout of 1931, he “had given up the ground of high principle” and “implicitly legitimated the claims of other sectors for federal assistance.” Critics raised the same criticisms they would raise about Obama’s bailout plans seventy-eight years later. If the banks get a bailout, why not everyone else? Were bailouts only for the rich?

Exacerbating the entire situation was the RFC itself. Hoover’s leading weapon to combat the Depression performed with TARP-like languor, secrecy, and nepotism. Throughout 1932, as banks continued to topple by the hundreds, the RFC disbursed only three-quarters of its available money. Although Hoover had declared that the agency was “not created for the aid of big industries or big banks,” a record of its operations revealed that most of its money had indeed gone to a very few of the country’s biggest financial institutions. In June of 1932, the RFC’s president, Charles G. Dawes—who had just served as vice president of the United States under Calvin Coolidge—resigned his post, took a new job as head of the Central Republic Bank in Chicago, and promptly secured for his employer an RFC loan that nearly equaled the bank’s total deposits. Dawes’s successor, Atlee Pomerene, then lent another $12 million to a Cleveland bank of which he remained a director.

These facts were, in the end, wrestled out in the open only by congressional fiat. The recipients of some $642 million of the RFC’s loans—nearly half its total expenditures—were not revealed at all. Hoover, like Obama, had insisted on secrecy to keep the proceedings from being “politicized,” but, inevitably, this fear of politicization in the end only led to more politics. The writer John T. Flynn, who reported much of the RFC scandal in the pages of this magazine, found that most of the money was distributed “by a group of directors drawn from those business groups whose performances during the pre-crash years have rendered them objects of suspicion to the American people” and that the “immense sums they dispensed were given to borrowers, many of whom, to put it mildly, have forfeited, justly or unjustly, the confidence of the people.”

The RFC’s deliberations were understood—with good reason—not as effective management but as insider dealing: common financial practice through the 1920s, but politically and morally insupportable at a time when millions of Americans were losing their jobs, their homes, and their savings, and when some were literally dying of starvation. What’s more, even the loans that were made proved less than effective. The rescued banks, much like the rescued banks today, simply hoarded the new capital and refused to venture out into the marketplace.

Neither the RFC nor any of Hoover’s other programs did anything to seriously address the other major problems then plaguing the American economy: the decades-long farm crisis that was sweeping away Dust Bowl farmers’ actual soil along with their holdings; the near annihilation of the labor movement; a wildly unequal distribution of wealth; the lack of any real safety net for the old, the indigent, and the unemployable; a corrupt, non-transparent financial system that remained largely unregulated—in short, the need for systematic, wholesale reform of a nation that had foundered on the changing circumstances of the modern world.

It would have been very difficult to make most of these changes, because by and large they were advocated only by what were then the most radical individuals on the fringes of the political system. The one thing to be said in favor of such changes was that they were absolutely necessary.

By the summer of 1932, the country was in a state of near rebellion, with the “Bonus Army” of angry veterans camped out in Washington, farmers dumping their produce on the highways in protest, and mobs forcibly stopping evictions in the cities. The liberals in Congress had moved at last beyond Hoover, with even Jack Garner backing a $2.1-billion package of public works and direct relief. Hoover vetoed it, warning against the moral entrapments of “the dole.”

's most recent novel, <em>Strivers Row,</em> is the final installment in his "City of Fire" trilogy about New York City. His article "Change Without Movement," appeared in the June 2009 issue.

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