Amity Shlaes' Perspective:
What’s next after the Oscars? More Gatsby, of course. “The Great Gatsby,” featuring Leonardo DiCaprio and coming in May, will be the fourth, or by some counts the fifth or sixth, movie version of F. Scott Fitzgerald’s novel about the illusion created by false wealth in the 1920s.
The corollary to the “The Great Gatsby” in the literature of economics is another old “great,” “The Great Crash 1929,” by the economist John Kenneth Galbraith. Galbraith’s narrative, like Fitzgerald’s, is subtle, conjuring complex characters. Yet the effect of both books is the same: to display the 1920s as a decade full of false numbers and false people, reckless pilots who caused an economic wreck so catastrophic it necessitated 10 years of Depression.
And Galbraith assigns the pivotal role of the heedless Daisy Buchanan to Calvin Coolidge, the 30th U.S. president: “President Coolidge neither knew nor cared what was going on,” Galbraith writes. In other words, the 30th president was the one to fall asleep at the wheel of our economic car.
Since Galbraith published “Crash” in 1954, a series of scholarly works have shown this line of reasoning to be about as substantial as a champagne bubble. As early as the 1960s, for example, Milton Friedman and Anna Schwartz posited that monetary policy was the crucial force in the Great Depression. Their “A Monetary History of the United States, 1867-1960” mentions Coolidge precisely once, in a footnote.
Yet like the movie “Gatsby,” the Coolidge Stock Crash myth always comes back in a new version, airing without reference to previous discussion. Reviews of my new book about Coolidge have drawn the Gatsby analogy.
Some see another drama. It is true that Coolidge served as president from 1923 to 1929, leaving office just seven months before Black Tuesday. It is also true that the stock market rose alarmingly during his presidency, going from the level of 80 or so to a genuinely bubbly 310 when Coolidge left office. But there was no bubble in the rest of the economy and no huge price rises. Growth was strong, unemployment was low, productivity gains were admirable, and real wages grew.
And it wasn’t as if Coolidge didn’t know or care about the stock-market jump. After all, Coolidge, a man so cautious that even as the governor of Massachusetts he had chosen to rent rather than take a mortgage on a house, well recalled the seven previous drops, some extreme, in the Dow Jones Industrial Average of his adulthood. As stock prices rose, the president consulted the Treasury as well as an expert in financial governance named William Z. Ripley and Charles Merrill, co- founder of Merrill Lynch & Co.
Coolidge’s personal investing records at the Vermont Historical Society archive in Barre, Vermont, also reflect his concern.
In April 1928, for example, Coolidge instructed his banker in Northampton, Massachusetts, to sell 150 shares of Anaconda Copper that he had bought as far back as 1918. (Coolidge didn’t profit much: The stock went for 69 3/8, and he had bought it for 63 1/4.) In March 1928, the president sold stock in U.S. Steel, a company that was a kind of proxy for the business cycle, though he had held it for a decade. He also liquidated some Liberty bonds.
Privately, Coolidge counted on a crash and predicted the political consequences of such an event in conversation with his Secret Service man, Edmund Starling. “Well, they’re going to elect that Superman Hoover, and he’s going to have some trouble. He’s going to have to spend money, but it won’t be enough. Then the Democrats will come in. But they don’t know anything about money.”
What Galbraith and others take for Coolidge laziness was actually Coolidge restraint. Coolidge didn’t deem it appropriate for the federal government to intervene in the stock market. After all, in those days, there was no Securities and Exchange Commission; states regulated markets.
Policy at the Federal Reserve was not set by Coolidge but by the Fed and, to some extent, his mighty Treasury secretary, Andrew Mellon, whose autonomy Coolidge respected. Coolidge thought, too, that there was an issue of moral hazard: If the market crashed, buyers would learn from the agony not to buy on margin next time.
In his off-the-record press conferences, Coolidge told reporters repeatedly that market questions ought to be left to “the judgment and discretion of commissions and various states.” When it came to the question of brokers’ loans, Coolidge was once again explicit, saying to Henry Parker Willis, a journalist, that “if I were to give my own personal opinion about it, I should say that any loan made for gambling in stocks was an ‘excessive loan.’”
Galbraith and others are eager to isolate “gotcha” statements by Coolidge that misled the market. In his effort to appear neutral, Coolidge did from time to time supply bland lines that could be misinterpreted as bullish, and were. But the most egregious of the statements attributed to Coolidge, including one saying that late 1920s markets were “absolutely sound,” came from President Herbert Hoover, who resented Coolidge. And scouring Coolidge’s unpublished off-the-record news conferences, I didn’t find Coolidge boosting stocks aggressively.
Setting the crash aside, can one assign Coolidge any blame for the Great Depression? Some, especially when it came to tariffs, which Coolidge’s Republican Party supported.
But the greater culprits are Coolidge’s successors, Hoover, a more progressive Republican, and Democrat Franklin D. Roosevelt. Hoover raised taxes, signed the Smoot-Hawley Tariff Act and strong-armed businesses into wage increases they could ill afford. In addition, Hoover sent a general signal of government activism, which chilled markets. Roosevelt exacerbated the uncertainty with arbitrary interventions into policy in all areas.
One can argue that the Coolidge story isn’t that of a president causing the Depression. It is the story of a president postponing one. And that story, too, would make a good movie.
Amity Shlaes, director of the Bush Center Four Percent Growth Project, is the author of “Coolidge,” published by HarperCollins, and a Bloomberg View columnist.
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