A Patriot's History of the Modern World

by Larry Schweikart

  American movies featured a background of prosperity and abundance compared with Europe, even in scenes depicting “average” circumstances: saloons with walls of liquor, gangsters in nice cars, or Edith Head’s amazing outfits. Fifty years later, Jack Valenti, president of the Motion Picture Association of America, noted that America had succeeded in dominating foreign film markets “not because of armies, bayonets, or nuclear bombs, but because what we are exhibiting on foreign screens is what the people of those countries want to see.”194

  Over the next twenty years, as Europeans grappled with renewed nationalism and questioned the desirability of American influence, American filmmakers found it more difficult to penetrate increasingly closed markets, especially in Germany. At the same time, however, new markets for selling American exceptionalism opened in Latin America, especially after 1933, when Franklin Roosevelt enlisted the film industry in his “Good Neighbor Policy” toward South America. Nelson Rockefeller, in the Office of Coordinator of Inter-American Affairs (OCIAA), worked with Hollywood to make certain films that went “down South” were inoffensive. Scenes were removed from Down Argentine Way and OCIAA urged scenes removed from Juarez. By the time World War II arrived, pro–Latin American films appeared regularly, including Simon Bolivar, They Met in Argentina, The Road to Rio, and one of the most popular, Walt Disney’s animated Saludos Amigos (1943).195 In That Night in Rio (1941), Don Ameche “warbled a tune called ‘Chica Chica Boom Chic’ ” which said “My friends, I extend felicitations to our South American relations…. One hundred and thirty million people send regards to you….”196 Carmen Miranda and Lupe Vélez, the “Mexican Spitfire,” both were popular starlets, and despite the howls of guerrillas such as Augusto Sandino, who referred to “drug-dependent Yankees,” “cowards and criminals,” “blond beasts,” and “blond pirates,” Latinos enjoyed American films and admired Yankee prosperity.197 Once again, the United States had applied the same subconscious strategy used in Europe since 1920: expose everyone to the essence of American exceptionalism. And it worked wonders, even if it didn’t export the pillars of American exceptionalism to struggling foreign nations.

  From Boom to Gloom

  Above all, film—like every other aspect of American growth—prospered because of the growing access to capital and the willingness of people and companies to assume debt. Companies such as Singer Sewing Machines had offered terms to buyers as early as 1856; Cyrus McCormick conceived of an ingenious credit plan to allow groups of farmers to collectively purchase his expensive reapers in the late nineteenth century; and the per capita debt level of Americans rose every year after 1896. But it positively exploded in the 1920s, when it doubled. It is a critical misreading of history, however, to fall into the trap of explaining the “Roaring Twenties” as pure speculation. The willingness to take on more debt can be either a sign of economic desperation or, in this case, of growing faith in the economy. People borrowed in the 1920s because they had every expectation they not only would, but could pay back their loans. During the Depression, Keynes came up with the speculation explanation later popularized for lay readers by John Kenneth Galbraith in his book The Great Crash (1954). According to this theory, average people got sucked into a speculative fever in the stock market, driving up prices beyond all appropriate real values. Further, Keynes would argue in his 1936 General Theory of Employment, Interest, and Money that the stock market bubble constituted a great “sump” of wealth that short-circuited consumer spending, thus bringing about the crash in manufacturing.

  Both theoretical and empirical evidence, while not totally conclusive, strongly suggests Keynes and Galbraith were dead wrong. First, money—even invested in stocks—doesn’t lie dormant. It demands to be used, and finds its way back into new plants, employment, or other investment opportunities, as evidenced by the phenomenally low unemployment levels in the 1920s. There is simply no such thing as a “sump” of wealth, for by definition it would start losing value and no longer be wealth at all: it’s only useful when applied to projects that replace its value. Second, studies of the 1920s stock market have consistently produced no evidence (based on a variety of economic tests) of a “bubble.” In fact, stocks correlated with the real values of the companies they represented and/or reasonable expectations of future earnings based on past earnings of those firms. If anything, stocks in the 1920s have to be viewed as undervalued, given that from 1923 to 1929, dividends per share on average rose 61 percent. Moreover, stock prices were rising faster in France and Germany.198 Nevertheless, the myth of the “speculative boom” in stocks and its “causal” relationship to the Great Depression remains all too commonly held, and is consistently promoted by many leftist academics and the American media.

  Liberals have attempted to blame the Great Crash on the economic and tax policies of the 1920s, often singling out the presidency of Warren Harding for special criticism. The publisher of the Marion (Ohio) Daily Star, Harding was a senator who promised a “return to normalcy” in his 1920 presidential race. This meant more than just a return to peace but rather a return to low tax rates and prewar isolationism. With the election news carried for the first time by radio (KDKA in Pittsburgh), Harding crushed Democrat James Cox, who, like Harding, was also a newspaper publisher, taking 60 percent of the popular vote.

  Immediately Harding showed that he had little in common with Woodrow Wilson. His cabinet was made up of “a cross-section of successful America: a car manufacturer, two bankers, a hotel director, a farm-journal editor, an international lawyer, a rancher, an engineer, and only two professional politicians.”199 When millionaire Andrew Mellon traveled to Marion to meet with the president elect, Harding offered Mellon the position of secretary of the treasury, but Mellon said he didn’t want the job. Harding reportedly replied, “I know, and that’s why I want you.” He ordered Socialist Eugene V. Debs released from jail, where Wilson had stuck him for opposing the draft; and he created the Bureau of Veterans’ Affairs to handle the men returning from the Great War. Harding was the first president to call for the outlawing of lynching, and was the first to entertain questions from reporters at press conferences.

  Tasked by Harding to study wartime government revenues, Mellon discovered that the more the Wilson administration raised tax rates, the less revenue (proportionally) it received. While Mellon had no disagreement with the proposition that the rich should “pay their fair share,” he found it unsupportable for government to maintain a punitive system that provided less funding simply to “soak the rich.” Mellon drafted a plan to drastically cut tax rates across the board, though even after his substantial cuts, both the top and the lowest brackets of taxpayers still paid much higher rates than they had before the war. Mellon’s approach worked: federal revenues rose, while Harding’s budget cuts threw the government into a surplus for eight straight years. More important, Mellon’s adoption of what would fifty years later be called the “Laffer Curve,” in which tax rates on the rich were lowered to extract higher overall tax levels and actual revenue from the rich, proved prescient. The very top tier saw its share of taxes paid skyrocket by over 130 percent, while the two lowest tax brackets saw their share of total taxes paid fall dramatically.200

  As the wealthy classes poured their money into investments—particularly the wave of new technologies that had matured and been adopted by the public in the previous twenty years, including autos, radios, electrical generators, and telephones—production boomed and employment soared. At one point in 1926, the annual U.S. unemployment rate reached a staggeringly low 1.6 percent. (Economists argue that 4 percent constitutes “full employment” because some people will always be leaving existing jobs to look for others.) Essentially, Harding and Mellon, through tax cuts, had achieved the Communist dream of full employment. The courts assisted the boom by ruling against unions in three cases from 1915 to 1922, and in 1919 strikes by the unions flopped stupendously. Everywhere the success of capitalism was evident: as early as 1927, some 4.7 million American workers
were already covered by group health insurance; literacy soared as more books were sold than ever before (especially classics, such as Dickens, Tennyson, and Longfellow); and education spending rose by 400 percent from 1910 to 1930.201

  Harding’s death in 1923 left Calvin Coolidge (literally born on the Fourth of July) as president, but Coolidge persevered with the Mellon cuts and prosperity perked along. More so than even Harding, Coolidge kept his hands off business (famously quoted out of context as saying “The business of America is business”).202 His only soft spot came in his willingness to back farm parity programs, certainly an understandable political move given the carnage in the American agricultural heartland in the decade. Coolidge presided over five years of peace and prosperity, but didn’t have the heart to serve longer after his son died of a freak ailment—a blister on his foot that became infected. Some suggest Coolidge also saw the storm clouds of the recession coming and wanted out. Either way, he certainly never trusted his successor, the “Boy Wonder” as the press called Herbert Hoover. “That man has offered me unsolicited advice for six years,” Coolidge said, “all of it bad.”203 To his credit, Coolidge hadn’t listened. Now, the United States—and, as the mantle of leadership fell on America, the world—would be subjected to Hoover’s Progressive principles and policies. Coolidge had some premonitions that a downturn was coming, but his experience was rooted in the short recession of 1920, corrected by Harding’s “hands off” policy. Any difficulties, he thought, would be brief and relatively minor. In his final address to Congress, Coolidge observed that “no Congress of the United States ever assembled…has met with a more pleasing prospect [and] the country can regard the present with satisfaction and anticipate the future with optimism.”204

  A decade’s worth of rearranging populations, imposing ill-thought-out democratic structures, and irrepressible economic meddling had brought Europe into depression and growing civil unrest. All the treaties, compacts, and agreements had produced little more than a tissue-thin paper wall against aggression. None of the postwar structures set in place at Versailles—in Europe or around the world—had contributed to peace, stability, or prosperity. And all it would take to collapse the entire shaky edifice would be a handful of dictators with a will to power. Until that day, America was in the hands of Progressives, first Hoover and then FDR, and the world would never be the same.

  CHAPTER FOUR

  The Totalitarian Moment

  Time Line

  1930: London Naval Treaty signed; Smoot-Hawley Tariff becomes law; Nazis win 18.3 percent of the vote in Germany

  1931: Japan occupies Manchuria; Mao Zedong establishes Chinese Soviet Republic; Empire State Building completed

  1932: Battle of Shanghai (Japan vs. China); Dow Jones reaches lowest level in Great Depression (July); Franklin Roosevelt elected president

  1933: Hitler named chancellor of Germany (January), becomes dictator (March); New Deal begins in United States; “Bank Holiday” in United States; private ownership of gold prohibited in United States; Vatican signs accord with Adolf Hitler; Albert Einstein immigrates to United States; Prohibition repealed; USSR famine kills millions; France has five governments in one year

  1934: Hitler purges SA; Austrian chancellor Engelbert Dollfuss assassinated; Hitler named Fuehrer; Great Purge in USSR

  1935: Hitler announces German rearmament; Social Security Act passed (U.S.)

  1936: Germany reoccupies Rhineland; Italy annexes Ethiopia; Spanish Civil War begins; Rome-Berlin Axis announced

  1937: Japan invades China; U.S. gunboat Panay sunk by Japanese in China; “Rape of Nanking” in China

  1938: German Anschluss with Austria; Munich Agreement; Germany occupies Czechoslovakian Sudetenland; United States loans $25 million to China

  1939: Spanish Civil War ends; Franco becomes dictator of Spain; Germany occupies remainder of Czechoslovakia; Italy invades Albania; German-Soviet Non-Aggression Pact signed; Germany invades Poland (September); World War II begins in Europe

  Optimism about a new postwar peace and prosperity, which swept Europe after Versailles and was captured in the wild receptions for Wilson and Lindbergh, began to fade not long after the diplomats packed up their attaché cases. Despite a raft of agreements, pacts, and promises adopted in the ensuing decade, European states were already growing concerned about the new aggression by Benito Mussolini in Italy and the internal strife in Germany. Already, many of the newly formed states, including the German Weimar Republic, created in the mold of European-style democracy with its thick social safety net, pensions, and welfare programs, were unraveling. At Versailles, Wilson and others had failed to appreciate the profound nature of the missing elements in the new nations—namely common law, free-market capitalism, and an American understanding of property rights in a Europe steeped in radical socialism and unionism.

  Economic decline only accelerated the already inevitable fraying of these societies, and nations sought new ways to bolster their own positions by taxing their neighbors through tariffs or manipulating their money supply to gain an advantage. Added to those pressures, veterans returning home from war, particularly in Britain, France, and Germany, found themselves trying to reenter industries and agricultural systems that, for all intents and purposes, already stood at full employment in 1919. Almost all industries and farms were at or near capacity in their productivity when the war ended, meaning that when millions of new workers entered the workforce, a massive labor and product surplus ensued—especially thanks to wartime spending (with funds coerced from taxpayers that would be impossible to acquire during peacetime). In Britain, plans to increase productivity by replacing inefficient plants had been put on hold for the better part of five years during the war, while in America, wartime controls and the heavy hand of the Sherman Antitrust Act and Clayton Act, which significantly restricted business combinations and corporate flexibility, stymied real growth. Wartime taxes had also skyrocketed in the United States, making a slowdown inevitable. This postwar chaos was only exacerbated by the dislocations of the Versailles Treaty itself. Compounded by political forces, particularly the rise of fascism and the continuing infestation of socialism, communism, and anarchical agitators, the world was ripe for a disaster.

  America could have served as both a lender of last resort and a consumer of last resort if the boom of the Roaring Twenties had lasted. But the downturn in production in late 1928 cascaded into a stock market panic, caused in part by the Federal Reserve’s contractionist monetary policies and by remaining too long on the gold standard. Although Federal Reserve blunders might have brought down the economy by themselves, Congress added insult to injury with the Smoot-Hawley Tariff, passed in 1930. Smoot-Hawley’s duties—averaging a 5 percent increase on most goods but soaring as high as over 30 percent on many raw materials—massively increased the price for American goods. Over time, this blunder would account for a loss of 5 percent of GNP, or an amount larger than the economic impact of 9/11 and Hurricane Katrina combined.1 Work began on the tariff in 1929, clearing the House in May of the same year. Smoot-Hawley hadn’t even officially passed before businessmen began reacting, as they recognized higher prices would cause sales to plummet. While the Senate debated the bill in October, the markets plunged. Although it is impossible to quantify the exact cause and effect, and while certainly correlation does not equal causation, it is clear that the impending price hikes spurred some companies and investors to sell off stock holdings to get liquid. At the same time, an anticipated sales slump caused employers to start contracting operations to protect themselves. And, to add a poison cherry on top of the destructive concoction, the tariff would severely stifle foreign exports to America and negatively affect other countries’ balance of payments, meaning that other nations would respond instantly with new tariff barriers to protect themselves. International commerce was heading for hard times.

  President Herbert Hoover’s “big government” solutions made matters even worse, as he panicked at the prospect of deficits.
A mining engineer by trade, Hoover had gained a glowing reputation as chairman of the Commission for Relief in Belgium in 1914, and after the United States joined the war he used the American Relief Administration to organize food shipments to starving Europeans. Harding named him secretary of commerce in 1921, and he soon began a hustle-bustle of high-profile activity that made him more recognizable than the president himself. Hoover instituted and oversaw manufacturing statistics, set up subdepartments charged with regulating air travel, and quietly grabbed powers from other departments that, under the low-key Harding administration, chose not to use them. He turned Commerce into a pro-business organization under the term “associationalism,” instituted the “Own Your Own Home” campaign, and promoted Hollywood movies overseas. His enthusiasm for business concealed a darker affinity for big-government activism.

  Coolidge, attuned to Hoover’s Progressivism, was not fooled. He disliked and distrusted him, reversing the press’s term and derisively referring to him as “Wonder Boy.” Once the Depression came two years into Hoover’s presidency, he showed his full colors, ignoring Secretary Mellon’s advice to keep the government’s hands off the economy. Hoover’s labor policies kept wages high at a time when they needed to fall.2 The recession, according to economics professor Lee Ohanian, was “three times worse—at a minimum—than it otherwise would have been, because of Hoover.”3 To add further barriers to recovery, Hoover hiked taxes, imposing a tax on every personal and business check written, which further slowed commerce. The Reconstruction Finance Corporation (RFC), created in 1932 to support struggling banks, had the opposite effect of inducing panic when news of financial institutions’ and other firms’ receiving assistance was published (as required by law). Teetering banks tipped over the edge once depositors saw them listed as “troubled” and withdrew their cash. Then, as the coup de grâce, between 1929 and 1933, the Federal Reserve turned the crisis into a depression by failing to support the banking system with adequate cash injections as per its charter.4