The Bear’s Lair: Suppose Al Smith had won in 1928

Looking back on past critical elections, those readers generally agreeing with this column will have a number of “turning point” elections in which they could wish the more “conservative” candidate had won, although our definitions of “conservative” may differ. In one case, however, one could wish that the more liberal (in the American sense) candidate had won. That is the U.S. Presidential election of 1928, in which not only would the Democrat Al Smith have been a more satisfactory President economically than Herbert Hoover, but his probable re-election in 1932 would have deprived the world of the New Deal.

Since Hoover won the 1928 election by a popular majority of 58% to 41%, and by 444 electoral votes to 87, it is difficult to imagine a world in which Smith beat him. Hoover had a high reputation; more important, he was succeeding an immensely and justifiably popular President in Calvin Coolidge, and his platform suggested few changes from Coolidge’s sound and effective economic policies. It was known that Coolidge disliked him, but that dislike was thought to be the product of two differing personalities and not, as events were to prove, two very different philosophies of government. Smith on the other hand was very New York, Catholic and an ardent anti-Prohibitionist; even with Joseph Robinson of Arkansas on his ticket he ought to have had difficulty in heavily Protestant, nativist Southern states.

Actually, Smith’s weakest region was the Midwest; he carried only 34% of the votes in Pennsylvania and Ohio and 29% in Michigan. Also, he narrowly failed to carry New York, which ought to have been a gimme. Still, swing votes towards him at a uniform rate, and he picks up extra states quickly, starting with New York, followed soon by Virginia and Texas. Give him a uniform 7.75% swing from the actual result, and he gets only 49% of the vote to Hoover’s 51%, but just carries now-marginal Illinois, giving him 275 electoral votes to Hoover’s 256 and the Presidency. Let us postulate this as the Earth-2 result. What difference does it make to history?

For a start, the Wall Street Crash probably happens several months earlier, and from a lower level. Hoover’s election and inauguration were rocket fuel for the market, overcoming even a modest increase in interest rates in March 1929 to push it to a vertiginous peak (though much lower, by any valuation measure, than the level at which it stands today) in September 1929. Smith’s unexpected and narrow victory would have been a shock to the market – back then, most brokers and almost all retail investors and institutional fund managers were Republicans. So, in Smith’s Earth-2 you can look for a market peak around the beginning of 1929, and a correspondingly milder initial decline, perhaps by 40% rather than 50%. That would have left the market at the end of 1929 perhaps 10% below its level in our Earth-1, but with considerably less malinvestment having taken place during the year.

In terms of policy, the first major divergence between Earth-2’s Smith Administration and our own Hoover Administration would have been the non-appearance of the Smoot-Hawley tariff. If Smith had won a narrow victory as described above, the Senate would probably have remained narrowly Republican while the House would have been closely divided, as it became in our world in 1930. With such an alignment of forces, passage of the Smoot-Hawley Tariff would have been impossible, particularly as the Democrats generally and Smith in particular were anti-protectionist. With Smoot-Hawley out of the picture, or perhaps replaced by a tariff measure that mildly lowered the protectionist 1922 Fordney-McCumber tariff, the devastation of world trade, collapsing by fully 65% between 1929 and the bottom of the Depression, would not have occurred. Trade would still have declined but much less severely, perhaps by around 40% at the nadir. Domestically and internationally, that divergence from Earth-1’s path would have had important implications.

On Earth-1, the next crisis that worsened the Great Depression was the implosion of the U.S. banking system, initially triggered by a run on a Bronx branch of the Bank of United States on December 10, 1930. The Bank of United States, formed in 1913, catered to immigrants and the New York Jewish community, and by December 1930 was the third largest bank in New York, with over $200 million of deposits. However, the last stage of its growth had been triggered by a series of mergers in 1928-29, the last two, with Colonial Bank and the Bank of the Rockaways, in April-May 1929. With the stock market crash having occurred at the beginning of 1929 under the Smith Administration, the Bank of United States would have completed two fewer mergers, thus would have been considerably smaller and less dominant in the New York banking system at the time of its demise. Its losses on 1929’s brokerage margin lending would also have been less. Hence on Earth-2 it might not have collapsed, and its collapse, had it occurred would have been less damaging.

Even on Earth-2, the stock market crash and its aftermath would have brought on many collapses of banks that had become unsound in the heady atmosphere of the late 1920s. However, with considerably fewer banking collapses, and an easy-money Democrat in the White House, the Fed would have been less restrictive in 1931, after the first round of collapses had occurred (most of its Earth-1 1931 restrictiveness came from its not allowing properly for the shrinkage in the banking system). Once again, the Earth-2 trajectory of the Depression under Smith would have been less severe than in Earth-1.

Turning now to the measures the Smith administration might have taken to alleviate the Depression, we can be sure that it would not have begun the massive program of lending to politically connected corporations undertaken by Herbert Hoover’s Reconstruction Finance Corporation in an attempt to prevent the necessary liquidations and restructuring. It would also not have purveyed a false optimism about the Depression’s severity, as did Hoover, because it would have been able to blame the Depression, however unfairly, mostly on its predecessors. Conversely, it would not have engaged in the massive program of state control involved in the early New Deal – in Earth-1 Smith broke with FDR when this happened, forming the Liberty League to oppose him.

Smith was neither a corporatist, as was Hoover, nor a quasi-socialist, as was FDR, nor did he suffer from those two gentlemen’s egomania and conviction of their own brilliance. Instead, he would have relied on his Cabinet for support and advice in designing remedies for the Depression. That Cabinet’s leading economic member would have been John J. Raskob (1879-1950) at the Treasury Department succeeding Andrew Mellon. Raskob, who had been chief financial officer at both DuPont and General Motors, was as capitalist as Mellon, but would not have allowed himself to be overruled by a bullying interventionist President, as Mellon did. However, both Smith and Raskob would in what was already the Democrat tradition have been prepared to spend money and run budget deficits to alleviate depression.

That spending would have been undertaken by Smith’s close friend Robert Moses (1888-1981), not as Secretary of Transportation (that post was only created in 1966) but as Secretary of Commerce, a post Hoover had used for self-aggrandisement under Presidents Harding and Coolidge. Moses, given the whole country to play with, would undoubtedly have created a version of the Interstate Highway System, thirty years early. He would have begun in the densely-populated East Coast, creating his own versions of the New Jersey Turnpike (begun in 1948 on Earth-1) and the Pennsylvania Turnpike (begun in 1937 on Earth-1).

However, given Moses’ peculiarities, there would have been a difference. Both roads would have been parkways, the New Jersey Parkway and the Pennsylvania Parkway, with tight 40mph bends, suicidally short on/off ramps and low bridges that prevented trucks or buses carrying riff-raff from using them. The roads’ long-term effect on the U.S. East Coast’s commerce might thus have been damaging (though the railroads would have survived longer); their construction’s short-term effect on U.S. economic recovery would have been thoroughly beneficial.

One final Earth-1 error Smith would have avoided: The Depression would have been winding down by early 1931, so Smith would not even have dreamed of undertaking Hoover’s catastrophic Revenue Act of 1932, which raised top rates of income tax from 25% to 63% and plunged the U.S. economy into a final downward leg in 1932-33 that was far worse than the first two. Smith had much too much sense for that.

With the Depression in full remission for some eighteen months, and unemployment declining from a peak much lower than on Earth-1, Smith would have enjoyed an easy re-election in 1932, with neither a primary challenge from New York Governor Roosevelt nor a Republican challenge from a now somewhat deranged Herbert Hoover having any effect. His second term would have been one of triumphant economic recovery, with none of the meddling, Big Government or statism seen under FDR. Moses would have extended his roadbuilding schemes to a gigantic Transcontinental Parkway, with gorgeously landscaped verdant well-irrigated center reservations snaking sinuously through the flat Nevada desert, and unnecessary corners sharp enough to keep speeds down to a level that ensured smooth running for the Packards and Pierce-Arrows that used it. Smith would then have entered an honored retirement in 1936.

But what of World War II, you ask. Surely Smith’s doubtless mediocre successor (he would have ensured the unsound FDR did not succeed him) whether Democrat or, worse still, isolationist Republican, would have made a disastrous mess of U.S. participation in World War II!

Ah, well that is where the Smith Administration would have brought an even greater benefit internationally than domestically. With the 1929 bubble having deflated earlier, no Smoot-Hawley and the U.S. running a loose money and Moses-driven budget deficit policy that would have prevented the dollar from becoming overvalued, monetary and economic conditions on the continent of Europe in early 1931 would have been considerably more relaxed than on Earth 1. Specifically, Austria’s Creditanstalt would not have suffered a run on May 11, 1931 nor the German Darmstädter Bank on June 17, 1931. Germany therefore would like the United States have suffered a considerably milder depression than on Earth-1, probably alleviating by late 1931.

That would very likely have kept in power the German Center Party government of Heinrich Brüning (1885-1970), which on Earth-1 collapsed in May 1932. Brüning was only moderately skilled, but a much more competent figure from the same political group, Konrad Adenauer (1876-1967) the President of the Prussian State Council, was available to succeed him if he faltered. Certainly, in a Germany beginning to recover from a less severe depression, there would have been no surge to power by the fringe politician Adolf Hitler, either in 1932 or later in the gradually more prosperous 1930s. He would have had to retire to his cottage near Berchtesgaden, to write a second volume of his best-selling memoirs.

Truly, the Alfred E. Smith administration would have been an enormous improvement on what we endured here on Earth-1.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)