Responding to the collapse of several major investment banks this week, John McCain reassured us, "I think still -- the fundamentals of our economy are strong." That move comes from an old playbook: On Oct. 25, 1929, Herbert Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."
The day before Hoover insisted that the fundamentals were strong was the day that came to be known as Black Thursday, when in heavy trading the Dow Jones Industrial Average lost about 9 percent of its value. And while, in endless stock-footage documentaries showing images of dumbfounded traders over a soundtrack of mournful jazz clarinets, the crash is supposed to begin the Great Depression, it wasn't quite so. The real cause was the collapse of the banking system, which followed the crash in part because Hoover believed strong fundamentals would protect the economy from disaster.
For the likes of Hoover and McCain, asserting the strength of fundamentals is shorthand for saying that business leaders, with maybe a little cheerleading, can sort out the crisis and that Congress should not try to regulate their behavior. It's too soon to know if McCain will be proved right (I doubt it), but Hoover certainly turned out to be wrong.
At the time, Sen. Robert Wagner, a New York Democrat, characterized Hoover's response to the crisis as "the time-worn Republican policy: to do nothing and when the pressure becomes irresistible to do as little as possible." In fairness, Hoover didn't quite "do nothing," but he followed a script that may sound familiar to students of the modern Republican Party.
Hoover worked to get businessmen to respond to the crisis by herding them into conferences and urging them to cooperate. He backed immigration restriction and a cut in the capital-gains tax. He quarreled with the unemployment figures from the Bureau of Labor Statistics. None of it worked, and yet Hoover insisted on the soundness of fundamentals, blaming the continuing crisis on whiners: "The income of a large part of our people is not reduced by the depression," he said, "but is affected by unnecessary fears and pessimism." He urged his fellow countrymen to count on "the magnificent working of the Federal Reserve system and the inherently sound condition of the banks."
But the banks were not inherently sound; they depended on the unsound foundation of 1920s lending. After the crash, the president said the fundamentals were strong, but American consumers said, in effect, well, we'll see, and their credit-driven buying slowed. Purchases of consumer durables in 1930 were about 20 percent lower than they were in 1929. Less purchasing meant less selling and more layoffs, which meant still less purchasing and soon more defaulting. The banks began to fail. Meanwhile, the "magnificent working of the Federal Reserve" did not stop the bank failures, which increased to sickening levels as Hoover's term ground on and the reality of the Depression became undeniable.
If this sounds unsettlingly familiar, it should: Ill-advised lending and borrowing also contributed to the apparent economic run-up we've seen in recent years, and the collapse of that credit bubble has brought on the present crisis. Whether it will develop into a disaster like that of 1931-1932 depends on whether we follow John McCain's suggestions and Hoover's playbook, or take a different tack.
For even when, under irresistible pressure, Hoover moved to do more, he didn't do enough. In the last year of his dismal presidency, he backed a federal effort to bail out the banks, with some success. But this policy offered no speedy relief to the ordinary voter -- by intention, as Hoover's Treasury Secretary Ogden Mills said, the point was to let "business do for itself what the government cannot hope to do for it." While bailing out business is a defensible strategy on the merits, it's shockingly immoral to offer a federal safety net to the rich while extending bromides about sound fundamentals to the poor.
For Hoover as for McCain, the insistence on "sound fundamentals" means that if necessary, the government will throw a life preserver to business leaders; the rest of us are on our own. Franklin Roosevelt knew how to answer: "The present administration has either forgotten or it does not want to remember the infantry of our economic army. These unhappy times call for ... plans ... that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the pyramid." He echoed his cousin/uncle Theodore, who declared, "We must protect the crushable elements at the base of our present industrial structure." In an economic crisis, these ideas are the true, and sound, American fundamentals.