Post a Comment On: China Matters

Thanks to ESWN for the link

The mills of the Internet grind slow but exceeding fine, and I am grateful to Professor Brad DeLong for discovering and exerting this post on his website on July 26, 2007, about a half year after I wrote it.

By coincidence, I had been intending to repost my pieces on Hoover in commemoration of his role in the summer movie blockbuster Transformers. I don’t think I am spoiling the film for serious cineastes by revealing that Herbert Hoover is depicted as the leader of the government/business consortium that covers up and exploits the capture of arch Decepticon Megatron in the early 20th century.

This depiction of Hoover’s powerful industrialist/financier/insider mojo is a welcome reminder that he was more of an implacable, relentless, and reflexively secretive Dick Cheney type than the hapless Elmer Fudd mocked by his post-Depression critics.

For interested readers, here are links to the two other Hoover-related posts I wrote at the same time.

Walter Liggett, Last of the Muckrakers, provides a history of the journalist who brought the story of Hoover’s role in the Kaiping affair before the American public in his 1930s biography, The Rise of Herbert Hoover. A well-known journalist and progressive in his time who was murdered for his crusade against crime and corruption in Minnesota, he was smeared as a blackmailer by Herbert Hoover’s supporters and virtually forgotten. That he is known to us today is a tribute to the indefatigable efforts of his daughter, Marda Woodbury, to document her father’s life and contributions and defend his reputation.

The Coolie Quagmire: Flogging, Sodomy, and Imperial Overreach on the Rand describes an early attempt to turn labor into a controlled, scientifically-managed global commodity to maximize the profitability of resource projects in distant corners of the world: the export 50,000 Chinese laborers to work in the South African gold fields in the 1900s. The project—for which Hoover’s China Mining and Engineering Corporation, owner of the Kaiping mines, organized the supply of coolies—was a disaster. How this system collapsed, as Chinese workers perversely refused to respond as expected to the array of positive and negative incentives designed to elicit submission and productivity, and helped bring down the Tory government at the same time, is one of the great cautionary tales of 20th century capitalism.
CH, 7/26/07

China Matters jumps into the wayback machine, sets the controls for Tianjin 1900—the Boxer Rebellion-- and revisits one of the great political coverups in 20th century US political history: Herbert Hoover’s suppression of his pivotal and deplorable role in the alienation of China’s Kaiping Coal Mines from Chinese ownership.

In his indefatigable attempt to obscure his actions, Hoover took image control and management to a high level that students of 21st century American politics may find instantly recognizable.

Ironically, by suppressing the truth about his opportunism, ruthless determination, and undeniable business acumen, Hoover made it possible for the image that he detested—that of the out-of-touch, blundering plutocrat-in-chief who touched off the Great Depression—to take hold in the public mind.

The post includes a detailed relation of the Kaiping affair.

The legacy of Herbert Hoover is remarkably contested.

Ever since the 1920s, pro and anti-Hoover forces have engaged in a fierce, no-holds-barred battle to establish the verdict on this intelligent, determined, introverted—and cold, callous, and intensely manipulative--man.

To the general public, Hoover is a punchline in jokes about the Great Depression. But for serious students of Hoover, the emphasis has always been on taking the moral measure of the financier and humanitarian who achieved remarkable wealth, power, and worldwide recognition long before he ascended to the Presidency.

Was he a ruthless, unscrupulous profiteer or a misunderstood apostle of rational business administration, economic efficiency, and benevolent progressivism?

Remarkably, the best documented and most accurate picture of Hoover can be found at the beginning of his career, in China, in the case of the alienation of the vast Kaiping Coal Mines from Chinese control.

Thanks to a notorious court case—and Hoover’s determined attempts to obscure and distort revelations that reflected badly upon him—we can form a relatively unambiguous judgment of the man and his methods.

The story, briefly, is this.

Herbert Hoover came to China in 1899, a young man of 24, with a reputation earned in the Australian gold fields as a shrewd, capable, and energetic mine manager—and as an ambitious, Machiavellian manipulator who had schemed unsuccessfully to supplant his boss.

He was sent to China by the London mine management firm of Bewick, Moreing & Company, to expand a relationship it had developed with the Kaiping Coal Mines and their manager, Chang Yan-mao.

Kaiping was one of the crown jewels of Li Hung-chang’s self-strengthening movement. Located above an immense coal reserve near the present-day city of Tangshan, the mines had flourished under the administration and financial management of Tang Ting-shu, an able comprador, and were producing almost 500,000 tons per annum by the turn of the century.

However, the general manager position passed to an apparently less capable individual, Manchu bannerman and court insider Chang Yan-mao, who was unable to introduce needed capital for the mine from either domestic private or government sources. In the disastrous aftermath of the Sino-Japanese War of 1895, with the possibility of China collapsing into spheres of Western and Japanese influence, Chang began an awkward flirtation with Bewick, Moreing to gain capital and some measure of security for the enterprise from British interests.

Hoover was dispatched to China in furtherance of this strategy, to protect Bewick, Moreing’s interests (the firm had bought and distributed Kaiping’s debentures—unsecured debt—to finance the construction of the port of Qinhuangdao), and to promote its participation in the Kaiping mines and other potential natural resource projects in the area.

Events took a dramatic turn with the explosion of the Boxer Rebellion in 1900. Chang Yan-mao and Hoover were both in Tianjin during the siege. Chang was suspected of sympathy with the court and the Boxers and narrowly escaped execution by the Allied command inside Tianjin. Russian troops occupied the Kaiping fields, creating anxiety in Chang’s mind that the mines might be confiscated without compensation as a war reparation.

Chang decided that the enterprise had to be placed under the protection of a benign foreign power, namely Great Britain, through the good offices of Bewick, Moreing & Co., by means of a voluntary, non-hostile transaction that would ensure that the interests of the existing stockholders and, not least of all, Chang Yan-mao himself, would be protected.

Therefore, Chang hurriedly deeded over the entire enterprise to Hoover as trustee, contingent that the enterprise be recapitalized with an additional 1,000,000 pounds and reconstituted as a joint Sino-British enterprise.

If the story ended here, Hoover would have probably received a well-earned attaboy from history for realizing this once-in-a-lifetime opportunity so perspicaciously and resolutely.

However, events—and Hoover’s role in them—quickly became more tangled and less laudable.

The wealth of Bewick, Moreing’s partners came not from the profits of the firm, but from their private speculations in the stocks of the mines with which they were affiliated.

The agreement that Hoover took to London defined him as trustee for a Kaiping enterprise whose assets and ownership should be converted directly into the new Sino-British company.

This left no provision for “promotional fees”, the distribution of shares without compensation to middlemen such as the Bewick, Moreing partners, their friends, and associates in return for their efforts in midwifing the new corporation.

Hoover was thereupon sent back to obtain a revised agreement which listed Hoover as the agent of Bewick, Moreing lead principal C.A. Moreing, thereby freeing Hoover from sole and explicit duty as trustee to protect the interests of Kaiping, and allowing the transaction to be structured to include benefits for Moreing and other promoters.

To obtain Chang’s agreement to this significant revision, Hoover concluded a side agreement with Chang defining the new company as a joint Sino-British enterprise with equal say in management, a China board and a London board.

Again, this could be regarded as an understandable, if awkward measure to ensure that Bewick, Moreing (or at least its partners) received the incentive and reward necessary for lining up the financing for this new venture.

However, Hoover spent the next seven months in China browbeating and marginalizing the existing management, sidelining and denigrating the China board, unilaterally placing his people in key positions inside the enterprise and, in general, consolidating foreign control of Kaiping in violation of the agreement.

The fatal piece of overreach by Bewick, Moreing, however, was its disregard of the requirement that the enterprise be recapitalized.

Other than the injection of 100,000 pounds of capital as earnest money needed to secure physical possession of the deeds to the mine by Hoover (and one hostile author, John Hamill, claimed that the money was simply wired into an account in Tianjin for one day and then wired out again), Bewick, Moreing did not arrange any significant new equity for Kaiping.

Instead, it burdened the new enterprise with new debt, in the form of 500,000 pounds of debentures bearing 6% interest.

By 1902, widespread dissatisfaction among the original shareholders of Kaiping (who now included many foreigners) was reported.

Then, fatefully, in November 1902, local Chinese managers raised the dragon flag over the mines to honor the empress dowager’s birthday. They were rebuffed by foreign management, which took down the Chinese flag. A contingent of Chinese troops arrived the next day to put the Chinese flag up again.

This incident concentrated the baleful attention of Yuan Shih- kai, the major power not only in North China but in the empire by virtue of his command of the Beiyang Army and his position as commissioner for Chihli and Jehol, the area in which the mine was located, on the enterprise and the convoluted transaction that had somehow alienated this crown jewel of Qing industrial policy from imperial control.

Chang Yan-mao had tardily and incompletely memorialized the throne on the deal, the details of which, when they became known to Yuan Shih-kai, incensed him.

Yuan demanded that Chang recover the properties for the empire. Remarkably, the throne accepted that the case be argued in the British courts.

The case went to trial in London in 1905 and apparently caused quite a sensation. It laid bare the seamier side of Bewick, Moreing’s business and methods, as well as featuring the oriental exoticism of Chang’s appearance in late imperial finery in court to give testimony.

The trial revealed that the reconstitution of the company had left it gutted.

Only 375,000 shares remained in the hands of the original shareholders. Most if not all of the balance of 625,000 shares had been distributed without compensation as promotional fees or as bonuses for the buyers of the new debentures.

The stock was watered and the rights and interests of the original shareholders had been trampled on. The corporation, instead of being recapitalized, was encumbered with new debt. Little if any of the money from the debenture issue had actually reached Kaiping.

On top of this, Hoover’s activities in violation of the joint management agreement he had concluded were fully aired, including some indiscreet remarks denigrating the China board.

Bewick, Moreing lost the case and was subjected to some pointed words from the bench. Hoover, both as partner in Bewick, Moreing and as the individual executing the skullduggery firsthand, was undeniably culpable.

Since the underlying transaction had not been repudiated—only Bewick, Moreing’s good faith in executing the agreement for joint management—the Sino-British company remained, with the proviso that the provisions of the agreement had to be put into effect.

Although the judge felt there were clear grounds for pursuing a criminal case against the individuals involved, in a piece of good news for Bewick, Moreing and Hoover, the Chinese government apparently had had enough of Western litigation.

After its position was legally vindicated, Yuan Shih-kai concentrated his efforts on developing a competing enterprise, Kailuan, in the same area. His faith in the oligopolistic theory of modern enterprise was rewarded when the resulting price war pushed Kaiping and Kailuan to merge operations in 1912.

For Hoover and Bewick, Moreing, the deleterious effects of the Kaiping debacle were minimal.

Hoover left China, aged 27, as a partner in Bewick, Moreing, purportedly already wealthy, with a pocketful of Kaiping shares, and his career launched as a global financier involved in virtually every resource industry from tin to gold to petroleum.

During the First World War he burnished his image as a benevolent, progressive, and supremely capable and honest captain of industry by orchestrating Belgian relief and the postwar food program. After service in high positions in the Harding and Coolidge cabinets, he convinced the American people that he was uniquely qualified to manage and expand America’s postwar prosperity.

Hoover’s reputation for probity and capability were important to him in his business dealings as well as his later political life, and his efforts to protect and advance his reputation became legendary.

When he entered political life, he employed sophisticated public relations efforts to achieve favorable coverage in the press. When he learned that anti-Hoover books were in preparation, Hoover did not limit himself to outraged rebuttals. He unleashed the FBI to perform background checks on the authors. His secretary, Lewis Strauss (later the spearhead in efforts to revoke Robert Oppenheimer’s security clearance) organized a burglary of one author’s office.

During Hoover’s career, the Kaiping affair hung over him like a dark cloud that he labored energetically to dissipate.

His agent went to England to secure all copies of the trial transcript to deny its contents to his enemies (at least one copy survives, in the library at Oxford).

He concocted a story in which he himself was the protector of Chang Yanmao and Kaiping appearing in the case as a neutral witness, while in truth he had been instrumental in efforts to sideline Chang and the Chinese management, and had provided information useful to the prosecution only under cross-examination.

Hoover orchestrated a blizzard of bespoke testimonials from supporters, had his version of events entered into the Congressional Record, and had his alleged heroics on behalf Kaiping retailed in The Making of Herbert Hoover, a piece of Tom Sawyer meets Horatio Alger meets Tom Swift hagiography penned by family friend Rose Wilder Lane (later author of the Little House on the Prairie series).

Last but not least, a campaign of denigration was launched against the spate of anti-Hoover books published in the early 1930s, which included The Rise of Herbert Hoover by Walter Liggett and The Strange Career of Mr. Hoover by John Hamill.

These books are significant for how much they got right in the Kaiping case.

The case itself was mindnumbingly complex, with the principals of Bewick, Moreing intent on concealing their intentions and actions from public scrutiny by manipulation of the corporate record. Documents and witnesses were inaccessible, both because of Hoover's efforts and because the principals were in England and not the United States. The legal case, which addressed commercial matters and corporate obligations more than individual liability, did not provide an easily identifiable "smoking gun".

The conclusion is inescapable that powerful and informed enemies of Hoover assisted the authors in unraveling the tangled financial and legal skein of the case, filling the documentary gaps Hoover had torn in the record, and pinpointing Hoover’s evasions and deceptions.

The anti-Hoover books that provide a relatively accurate accounting of Hoover’s role in the Kaiping affair are long out of print and exist in a few dusty libraries (reportedly, friends of Hoover went to significant effort and expense to suppress the books and remove them from circulation).

I came across The Rise of Herbert Hoover, by pioneering muckraker Walter Liggett, in a New England inn, courtesy of an interior decorator who bought used books by the case in order to give the lobby the look of a cozy library.

Given the complexity of the case and the amount of chaff the Hoover camp has thrown around, it would be impossible to realize a full picture of the Kaiping episode today without the efforts of Ellsworth Carlson and George Nash.

Carlson’s Harvard monograph, The Kaiping Mines (1877-1912), describes the events in detail, unravels the twisted financial machinations as much as possible, and concludes that “the greed and bad faith of Moreing and his associates in 1901 and 1902 [were] indisputable”.

Nash can be considered Hoover’s official biographer, who was recruited by the Herbert Hoover Presidential Library to chronicle the great man’s history. He is a well-known conservative author, sympathetic to Hoover, and in the body of his book describes the Kaiping events with careful neutrality.

He is also scrupulous in following up on and dissecting Hoover’s version of events.

In a four-page footnote(pp. 656-9) in his “The Life of Herbert Hoover: The Engineer 1874-1914, Nash details Hoover’s efforts to secure all copies of the trial transcript and elicit testimonials (drafted by Hoover) that presented a misleading version of Hoover’s actions and the nature of his participation in the trial intended to attest to “his honorable and/or tangential involvement in the case”.

In the footnote Nash remarks that “Hoover’s later explanations of his conduct in China often diverged from the account provided by the trial transcript and by documents entered in evidence at the trial…Hoover’s role…was scarcely a peripheral or ‘accidental’ one…As a key participant in the 1900-1901 transfer negotiations, his conduct was under severe scrutiny at the trial…Nor did Hoover’s testimony really win the case for Chang Yen-mao…Hoover’s later defenses also contained significant omissions.”

However, I do take issue with Nash’s concluding comment:

“In short, Hoover’s later defenses of his conduct in China did little to illuminate his role in the murky Kaiping drama. But that, of course, was not their purpose. In the 1920s particularly, when Hoover was obliged to retell the story of his days in China, he was under intense pressure to fend off potentially fatal threats to his continuance in public life. The effort to block his aspirations by ‘exposing’his past is a largely untold story that came to involve some prominent members of both political parties. Under the circumstances it is not surprising that Hoover and his associates devised a defense that fit the requirements of political survival.”

I think this statement improperly conflates Hoover’s misdeeds in China and the subsequent cover-up, and thereby reduces the Kaiping issue to one of Hoover’s right to practice the art of political self defense, whose exercise should not darken the reputation of the great and good man Nash considers Hoover to be.

Especially in retrospect and in consideration of Hoover’s dismal record as president, it is difficult to assert that the political enterprise named Herbert Hoover was so vital to history and the national interest that his skullduggery both in China and in suppressing the events deserved to be covered up. In terms of Hoover’s personal position, he was an extremely wealthy man and a powerful political force, if not a gifted politician. Personally and probably politically he could have survived a full and honest airing of the events in China.

But perhaps China was the true measure of Hoover. It made his fortune and also confirmed him in habits of secrecy, deception, and manipulation that carried on into his business and political career.

A cruel but not entirely spurious argument could be made that if Hoover had not yielded to his ego, passion for manipulating his public image, and his opaque and implacable style of dealing with people and situations that stood in his way, he might have made a better president than the one who backed into the Hawley-Smoot tariff act, declined to jawbone the Federal Reserve into standing up to Winston Churchill’s ruinous attempt to restore the English pound to the $5/pound exchange rate, and floundered through the beginning of the Great Depression.

Herbert Hoover’s fortune was made in China.

Perhaps the seeds of his downfall were sown there as well.