by Robert Sobel
The end of government is to keep open the opportunity for a more abundant life. Peace and prosperity are not finalities; they are only methods. It is too easy under their influence for a nation to become selfish and degenerate. This test has come to the United States. Our country has been provided with the resources with which it can enlarge its intellectual, moral, and spiritual life. The issue is in the hands of its people. Our faith in man and God is the justification for the belief in our continuing success.
14
Retirement
It was therefore my privilege, after seeing my administration so strongly endorsed by the country, to retire voluntarily from the greatest experience that can come to mortal man. In that way, I believed I could best serve the people who have honored me and the country which I love.
Last paragraph in The Autobiography of Calvin Coolidge
AFTER THE ELECTION, President-elect Hoover traveled to Washington to meet with Coolidge and make a request. There were four months between Election Day and the inauguration. Hoover planned to spend a month and a half of that time on a tour of Latin America, and asked Coolidge to place a battleship at his disposal for the trip. He recorded Coolidge’s response in his Memoirs: The Cabinet and the Presidency:He suggested I take a cruiser—“it would not cost so much.” However, since battleships as well as cruisers always must keep steam up and their crews aboard, that did not worry me much. I wanted room enough to take Mrs. Hoover, whose California upbringing enabled her to speak considerable Spanish. Also I wanted a diplomatic staff and representatives of the press, so as not only to evidence great interest in these countries but to educate the American people a little on our neighbors to the south. Finally, Mr. Coolidge put the battleship Maryland at my disposal; and the battleship Utah met us in Montevideo and brought us home.
In early December Coolidge prepared his final budget message, taking a day off to go quail shooting in Staunton, Virginia. He wore a ten-gallon hat and a white shirt and yellow tie underneath a bright green mackinaw, and posed for the photographers with his usual dead-pan face. Coolidge, who was not a sportsman, took many shots, but the quail had little to fear: he didn’t hit one.
Coolidge dispatched his final annual message to Congress on December 4. The confident document revealed the optimism felt by Coolidge and the nation as a whole:No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment, harmonious relations between management and wage earner, freedom from industrial strife, and the highest record of years of prosperity. In the foreign field there is peace, the good will that comes from mutual understanding, and the knowledge that the problems which a short time ago appeared so ominous are yielding to the touch of mutual friendship.
In his budget address, read to Congress the following day, December 5, Coolidge said there would be a smaller than hoped for surplus for 1929, due to the increased cost of government, especially in the area of national defense. Estimated receipts for 1929 were $3.831 billion and expenditures, $3.794 billion. Therefore, he did not ask for another tax cut.
In the message, Coolidge noted that in 1928, 54 percent of receipts had been derived from income taxes, against 42 percent in 1923. Coolidge had often asserted the tax cuts would boost income tax collections, and on the basis of these figures, he was correct. As indicated, Coolidge believed that lower taxes would stimulate the economy and lead to greater employment and higher wages, which would translate into higher tax revenues.
The budget caused no major discussions, and two days later the newspapers turned to Coolidge’s suggestion of a summer White House in the mountains near the city, perhaps in Maryland. Coolidge spoke of the stifling heat of the summer in the city, and how it was deleterious to the First Family’s health. Congressmen deserted Washington in late spring and returned in the fall for that reason. Work at the government’s offices fell off, and the pace of activity, always slow compared to New York or Chicago, became positively languid. But the president had to remain in Washington, and worked as hard in August as he did in March. In this suggestion, as with so much in his administration, Coolidge was repeating a proposal first made during the Harding years.
Toward the end of his administration, Coolidge’s supporters applauded and his opponents criticized him for having helped bring the country back to where it had been before the war. But Coolidge had not, of course, done this; annual government expenditures had more than quadrupled since the last prewar year—in 1916 government spending amounted to only $716 million; by 1928, the amount was up to $3.1 billion. Many argued that he had reversed the trend toward big government, but, despite his philosophical opposition to federal growth, Coolidge was prepared to expend funds for programs even Wilson, Taft, and Roosevelt had largely rejected. For example, he endorsed Mellon’s program to construct federal buildings in Washington, which in time transformed the capital from a dusty backwater to a major American city. Mellon told Coolidge that while the program would be costly—he spoke in terms of $250 million—it would be less expensive for the federal government to own its buildings than to lease space from private interests. This program, and others like it, had to be justified to Coolidge on these grounds.
This approach was the key to understanding Coolidge’s actions and reactions to expenditures. His goal was to hold the line on spending, and if possible roll it back, while at the same time reducing taxes, for he expected that this would result in greater personal freedom, continued prosperity, and a more moral population. To a large degree Coolidge succeeded in realizing the first two objectives during his administration. In 1923 total federal expenditures were $3.1 billion, and they were $3.0 billion in 1928. In these two years, despite the tax cuts, budget receipts were the same—$3.9 billion. The national debt fell from $22.3 billion to $17.6 billion. Even as the number of federal employees rose slightly during his tenure—537,000 in 1923 versus 561,000 in 1928—the number in Washington fell from 70,000 to 65,000; much of the increase was isolated to the growth in the Post Office Department.
Coolidge felt himself an anachronism even in the pre–New Deal Hoover administration, as he was a relic of a pre–World War I America in which state and local government had preeminence. In most ways, he was not comfortable with the increasing federalization of government. Indeed, Reagan, who so admired the Coolidge philosophy of reduced taxes and small government, actually did not cut spending, and he ran deficits that would have been unimaginable to Coolidge.
In the days leading up to Christmas 1928, the Coolidges were guests at several farewell dinner parties. In that season it was traditional for cabinet officers, in the order of seniority, to give parties, but the Coolidges’ imminent departure made them special that year. Secretary of State Kellogg was first, followed by Secretary of the Treasury Mellon, who basked in a popularity second only to that of Coolidge. Rumor had it that in putting together his cabinet, Hoover intended to ask him to remain in office, not surprising for the man who was being hailed as the greatest Treasury chief since Alexander Hamilton.
The economy seemed in fine shape, and in November Wall Street celebrated with a rally, the Dow rising from 255.23 on November 1 to 293.38 on November 30.
On December 4, 1928, as Coolidge’s optimistic State of the Union address was being read to Congress, the Dow ended the day at 291.30, only four points from its all time high. But there had been a selloff in the morning which was troublesome. Brokers’ loans were more than $5 billion, and interest rates on them more than 10 percent, a sign of overheating. There were also signs that investment pools were taking certain favored stocks “in hand”—that is, the market was rigged. For instance, RCA, one of the favorites for both bull and bear pools, closed at 407½, down 7½ points, but that day traded within a range of 47½ points.
Prices collapsed on December 6, the Dow closing at 279.79, for a loss of almost 4 percent in market value, as brokers’ loans reach
ed 12 percent, the highest in eight years. Volume was 5.4 million shares, and the selling started with the opening bell and continued through the session. The Dow fell to 271.05 the following day, and to 257.33 on December 8, which was a half-day Saturday session. In three days, then, stocks declined 33 points, or 11 percent, which would translate by early 1998 standards to a more than 900 point selloff. The talk on Wall Street was that now that Coolidge was leaving office, he would take the Coolidge luck with him.
The market, however, recovered the next session, Monday, December 10, closing up by more than six points. Of the actions that day, the New York Times said, “After Saturday’s convulsive reaction, the interest of the whole financial community was focused on the opening of the Stock Market yesterday. Large crowds were gathered wherever there was a ticker.”
After the recovery, brokers’ loans fell to 7½ percent. The short panic was over, and stocks advanced irregularly for the rest of the month. On the last trading session of 1928, the market celebrated with a 4.9 million share day, with the Dow ending at a record 300.00.
The economic news cheered the bulls. Adjusted for inflation, the GNP grew 49 percent from 1921 to 1928, the Harding–Coolidge years, the highest growth on record. By comparison, the growth from 1961 to 1968 was 38 percent, and that from 1982 to 1989, 29 percent. Family disposable income rose during the Coolidge years, when the unemployment rate averaged only 3.3 percent. Business prospered, and so did a great many ordinary Americans.
And, of course, the stock market performed well in Coolidge’s presidency. Critics point out that the crash came just half a year after Coolidge left office, and they argue that he should have foreseen the economic calamity. Yet historians have allowed their advantage of hindsight to color their assessment of the market leading up to the Great Crash of October 1929. As H. Stuart Hughes wrote, the historian “cannot give the full sense of events as reality in the process of becoming—because he knows the outcome. By no literary device or trick of false innocence can he recapture his historical virginity; it is idle for him to pretend to an unsophistication of judgement which fools nobody.”
As has been noted, after the crash, many pointed to seers like Roger Babson who had come close to calling it correctly, but Babson had at another time predicted sustained economic prosperity. And many, many more “seers” had been mistaken. During bull markets there are those who warn of impending disaster, and in bear markets those who talk of a market rise.
The front page news of early 1929 was of Britain’s ailing King George V, whose sons were rushing to his bedside from faraway lands, but the business pages focused on RCA’s $116 million purchase of the Victor Talking Machine Company, which came just weeks after the company acquired Keith–Albee–Orpheum and renamed it Radio–Keith–Orpheum, or RKO. RCA’s stock would hit a high of 420 in 1928, with a price-to-earnings ratio of better than 26. This was considered giddy, even for those times, but the news was so good that RCA seemed destined for even higher levels.
The December selloff and recovery were not unusual. There had been several such “corrections” during the 1920s, and there would be more to come. Stocks declined from 307.01 on January 2, 1929, to 296.98 on January 8, and then recovered to end the month at 317.51. As Coolidge prepared to leave office, investors, speculators, and others interested in the stock market were accustomed to such corrections and took them in stride. Why not? Didn’t stocks always come back?
Anyone familiar with the markets of the late 1990s would have been at home in the markets of 1928–1929. David Sarnoff of RCA and Alfred Sloan of General Motors were for that period what Bill Gates of Microsoft and Andrew Grove of Intel are for the late 1990s; media and autos dominated the late 1920s as software and microprocessors dominated 1997. The economic outlook in 1929—and in 1998—was unclouded, with impressive statistics reported for growth, inflation, and employment.
The stock markets in both periods were monitored carefully, and the bulls were delighted with the message—in September 1924 the Dow was just above the 100 level; in March 1929 the market closed above 300. The Dow had tripled over a five-year period. It was a staggering performance, one which would have impressed investors of early 1998.
Who could explain this unprecedented situation? Not since accurate records had been kept had the market soared as it did in this period. Stock market analysts found nothing in American history to compare to the Giant Bull Market. Wall Street analyst Thomas Shotwell resorted to comparing the situation to a similar period in European history—at the end of the Napoleonic Wars, no less. According to the “Financial and Economic Review of 1928,” published in the widely read 1929 World Telegram Almanac and Book of Facts, Shotwell argued that the sustained economic growth France and England experienced after the Napoleonic Wars offered the only situation comparable to the American boom in the 1920s. Shotwell stated that “the whole mystery of the present rise in stocks disappears” since “exactly the same thing happened in France and England after” the Battle of Waterloo in 1815. Those countries came out of a major war with a great deal of wealth, and with the war over the nations could focus their attention on a prospering economy. In Shotwell’s scheme, World War I served as the catalyst for the boom of the late 1920s, just as the Napoleonic Wars caused stocks to skyrocket for decades in the nineteenth century.
Shotwell’s argument was indeed a stretch, but his far-reaching indicated how difficult it was to explain the phenomenon of the bull market, especially for those who thought it would last indefinitely. And Shotwell’s central conclusion was optimistic: “The market is following natural laws of economics, and there is no reason why both prosperity and the market should not continue for years at this high level or even higher.”
Fortunately, the markets of the mid-1990s offer today’s readers a more plausible comparison. In the two years from March 1995 to March 1997, the Dow rose from the 4000 level to 7000—approximately 70 percent in a two-year span. At an annualized rate this performance is not very different from the 1924–1929 expansion. Did that mean that the market was preparing for a crash? Or, to duplicate the 1920s experience, would it have to rise to around 16000 before the calamity hit? Or even higher, because the market continued to rise irregularly to September 1929, when it peaked at 382.02.
In December 1996 Federal Reserve Chairman Alan Greenspan asked openly whether there was too much speculation on Wall Street, “irrational exuberance” causing a “bubble.” The next day the market declined sharply, but then recovered. Some criticized Greenspan for having caused the dip, while others praised him for sounding the warning. But the market set new records throughout January 1997, reaching a high of 7085 on March 11 and then declining 10 percent by April 14—the traditional level to be labeled a bear market correction—before moving upward once more.
The analysts of 1997 had chimed in before the upswing. The bears sounded their warnings. For instance, on March 28, 1997, Carlton Lutts wrote, “We are now in a bear market. We have no idea of how long this market decline will last. Right now, it’s smart to be out of the market to a large degree.” Robert Prechter, articulating the opinion of a number of economists, agreed: “Long term, the market is rolling over from bull to bear.” But the bulls were active, too. Curtis Hesler wrote, “I believe we could eventually see the Dow make it to the 8000 level this year,” and Donald Rowe went even further: “The sales and profits of American corporations have been improving relentlessly, quarter after quarter. Dow 7600 in 1997 and Dow 10000 by the year 2000 are not unreasonable targets for the U.S. stock market.” As it happened, the Dow crossed the 8000 level in July—so the bears had been wrong, and the bulls too timid.
In late July Greenspan told the House Banking Committee, “The recent performance of the economy, characterized by strong growth and low inflation, has been exceptional—and better than most anticipated.”
Clearly, economic predictions in 1997—and even comments from the Federal Reserve chairman—were all over the map, just as they had been in 1929. In the summer o
f 1997, there was no way to make predictions with any confidence. Likewise, there was no way of making an accurate forecast in the summer of 1929, when the outlook appeared more encouraging than it would at any time in the future—save perhaps the spring of 1998.
Did Coolidge offer optimistic statements in 1928? Certainly, but Clinton did the same in 1997, celebrating “the strongest economy in American history.” If the market declines sharply sometime in the Clinton administration and we enter a recession, what will the historians’ view of Clinton become? Despite his critics’ assertions, Coolidge had no way of foreseeing the crash. If there was any cloud in the sky before the Great Crash, it came in October 1928 with the death of Benjamin Strong, which in 1998 would be akin to the death of Alan Greenspan. Strong’s successor at the New York Fed, George Harrison, seemed content to continue his easy money policies, but Harrison lacked Strong’s credibility on Wall Street, which proved a problem when difficulties arose.
