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American History II


The Crash and the Great Depression

            In 1929 Yale University economist Irving Fisher stated confidently: "The nation is marching along a permanently high plateau of prosperity."  A mere five days later, the stock market crashed ushering in the Great Depression, the longest and deepest economic downturn in American history. Although the Great Crash is viewed as the starting point of the Great Depression, it was not the only cause. There were a number of contributing factors, although the American public found bankers, brokers, and businessmen to be responsible for the crash and the Depression.

            When Herbert Hoover was elected President in 1928, the mood of the general public was one of optimism and confidence in the U.S. economy. Few saw any reason why prosperity should not continue. In his acceptance speech for the Republican party nomination for the presidency, Hoover had said: "We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."

            Hoover's optimism and "boosterism" for U. S. businsses was shared by many in the beginning of 1929. An editorial in the January 1, 1929, edition of the New York Times stated: "It has been twelve months of unprecedented advance, of wonderful prosperity. If there is any way of judging the future by the past, this new year will be one of felicitation and hopefulness."

            That same year John Jacob Raskob, chief executive officer of General Motors and head of the Democratic National Committee published an article entitled "Everybody Ought to be Rich" in the Ladies Home Journal. Raskob suggested that every American could become wealthy by investing $15 a week in common stocks. While that was probably true, what Raskob, a well-paid executive, apparently failed to realize that the weekly salary of the ordinary worker was only about $17-$22. What is more important is what his advice indicates: that tremendous optimism had become a part of the culture of the post-World War I culture.

            For five years prior to 1929, the stock market had been characterized by rising prices; there was an enormous "bull market," a market in which large numbers of people were willing to buy stock at ever higher prices. (The opposite, a market characterized by falling prices, is called a "bear market.") The 1920s were the first period in which a large number of ordinary Americans owned stock. The question is why so many people had invested in the stock market during this time.

            Many people purchase stock to get the dividends companies pay to those who own shares in it. These periodic distributions of profits are called "dividends." The stock market was propped up by new investors entering the market, many of whom did so because they thought it as an easy way to get rich quick. Contemporary economic historians estimate that a relatively small number of Americans, only about four  million, had investments in the stock market at any one time. A constant influx of new investors coming in and old investors moving out ensured that new money was always floating around.

            Wages began to rise after World War I.  In fact, they rose slightly faster than the costs of housing and other necessities.  Higher wages meant that even average Americans had some surplus money to put into savings or invest in the stock market.  Many also had some surplus to spend on consumer goods, which stimulated employment and expansion and kept producers making profits. At this same time, banks made money more readily available at lower interest rates to more and more people. People were encouraged for the first time to buy "on credit," a practice that the culture had discouraged up to that time. Although economists debate the actual influence of this phenomenon on the stock market, it is conceivable that many people took out loans not only to buy cars and less durable consumer goods, but also to buy stock.

            From 1925 on, industry was over-producing. Because they anticipated that they would eventually sell the surplus to increasingly affluent workers, business leaders plowed most of their profits right back into their businesses, investing in new or additional factories, new machinery, and more workers. This led to even greater overproduction. This increased production gave the companies an aura of financial soundness and success, which encouraged Americans to buy more stock.

            Before the stock market crash of 1929, there were few, if any, effective legal guidelines for the buying and selling of stock. Free from legal guidelines, corporations began printing up more and more common stock. Many investors in the stock market practiced "buying on margin," that is, buying stock on credit. Confident that a given stock's value would rise, an investor put a down payment on the stock, expecting to pay the balance of the initial price of the stock and to also receive a hefty profit. The effect of this was to turn the stock market into a speculative pyramid game, in which most of the money "invested" in the market was not actually there.

            The psychology of consumption also fed the optimism of investors and gave them an unquestioning faith in the continued prosperity of the American economy. When the stock market crash did come, it was even more devastating because of people's unquestioned faith.

            In 1929, the stock market, not housing starts, sales of durable goods, or the financial health of banks, was viewed as the chief indicator of the state of the American economy.  In September of 1929, stock prices began to fluctuate, but these fluctuations were dismissed by most investors as "temporary."  What many people did not realize--or refused to admit-- was that stock prices were totally out of proportion to the actual profits that could be gained from the dividends companies were paying.  Also, by 1929, sales of goods and construction of factories were falling rapidly.  Both of these factors should have signaled potential investors that they should not buy stocks at that time. But stocks prices continued to climb. Very few people were worried; they still accepted Adam Smith's "self-adjusting economy" as doctrine and believed the problems would fix themselves.

            October 24, 1929, is known as "Black Thursday." On this day, large numbers of people began dumping their stocks as quickly as they could. Sell orders inundated market exchanges, and the bull market suddenly shifted to a bear market. By that evening, the market had stabilized a bit as J.P. Morgan and other financiers bought up stock to stop the panic and keep the market afloat.

            On Friday, October 25, the House of Morgan continued to keep the market stable; and it seemed that the panic was over. The weekend intervened, and as often happens to people with a lot of free time, they began to worry.  Thousands and thousands of people decided to sell whatever stock they still had as soon as the market opened on Monday. So on Monday, October 28, there was another wave of sell orders.

            The next day, October 29, 1929, is called "Black Tuesday" and marks the beginning of the Great Crash. This was the single most devastating financial day in the history of the New York Stock Exchange. Within the first few hours the stock market was open, prices fell far enough to wipe out all the gains that had been made in the previous year. Because the stock market was viewed as the chief indicator of the American economy, public confidence was shattered. Between October 29 and November 13 (when stock prices hit their lowest point) over $30 billion disappeared from the American economy. Americans had spent about the same amount on the war effort made for World War I.

            Optimism persisted despite the bad month on the stock market, and many leaders declared that the worst was over. John D. Rockefeller said: "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again." Unfortunately, the worst was not over. The question was how long it would take for prosperity to return. In 1930, the national income dropped from $87 billion to $75 billion. In 1931, it dropped to $59 billion. In 1932, national income fell to $42 billion. It dropped to $40 billion in 1933.

            Former President Coolidge, a man of few words, observed about the economic health of the United States: "This country is not in good condition."  The economic downturns of the 19th century had been called the "Panic of 1873" and the "Panic of 1893," etc.  President Hoover tried not to further alarm the public when he discussed the state of the economy in late 1929. So he called the 1929 downturn a "depression" rather than a "panic."  The name stuck, and the entire era became known as "the Great Depression."

            Of course, the United States was not alone in the Great Depression; it had struck all of the industrialized nations of the world, including Germany, Britain, and France. Moreover, Germany still had huge reparation payments to make to the Allies in the aftermath of World War I.  These reparation payments devastated the German economy and rapidly spiraling inflation began. Many Germans began carrying gold chains to use as money because the value of paper money issued by the German government dropped so rapidly.  At its worst, it took literally a basket full of paper German marks to buy a loaf of bread.  For their part, the Allied powers had borrowed considerable money from the United States during the war.  As their depressions hit, they were unable to pay it all back during the 1920s, and were now not only broke, but in debt.

            These perplexing economic problems caused a host of social problems, including individuals suffering from losing jobs, families breaking down because of the stresses of economic hardship, soaring high school drop out rates, increasing homelessness and the accompanying appearance of shanty towns, and increasing protests including armed farmers marching on local banks to prevent foreclosures and the "Bonus Army" of veterans marching on Washington to pressure Congress to pay  bonuses promised for their service in World War I.  The Hoover administration was utterly unable to make appropriate responses to these situations and even ordered the Army to disperse the "Bonus Army" and destroy the shanties demonstrators had erected in the mall between Washington monument and Lincoln Memorial. (General Douglas MacArthur and his adjutant, Col. Dwight D. Eisenhower led the army against the bonus demonstrtors.)

            Two basic economic facts soured the lives of most Americans. The first of these was unemployment, which rose to 25 percent of the nation's total workforce. The second was the inability to sell goods and services. With so much of the work force unemployed, nobody had the money to buy things. Farmers were especially hard-hit by the Great Depression. Many had gone into debt to buy machinery and land, and now could not make their payments. Low crop prices wiped out most people's hope of  profits. In addition to the usual problems, a great drought took place in 1931-32 in the Midwest and the South, turning much of the trans-Mississippi West into a "dust bowl." There was so much dust rising into the atmosphere that the cloud of dust cold be seen by ships approaching the east coast of the United States. Nevertheless, if farmers couldn't make a profit selling their products, at least they could still eat, so most stayed put. In contrast to popular images of farmers leaving the land, the 1930s actually had the lowest rate of migration from farms to cities.

            The day-to-day reality of the despair of millions of Americans was more typical, and more dismal, than many of the stereotypes of the Great Depression. These stereotypes, which include breadlines, "Okies" leaving the Dust Bowl and migrating to California, hoboes riding freight trains, bankrupt businessmen selling pencils or apples on street corners, etc., were more dramatic than the quiet desperation of millions of Americans, but also less far less typical.

            One-third of Americans' incomes were below what we would now call "the poverty line." A few industries actually managed to make a profit at the beginning of the 1930s as the public looked for a way to escape. If Americans couldn't find work, at least they could go for a drive, have a cigarette, or go to a movie. Correspondingly, sales of oil, gas, cigarettes, and movie tickets all went up during the Depression. Humorist Will Rogers remarked, "We're the first nation in the history of the world to go to the poorhouse in an automobile." Escapism was also evident in the glorification of a number of bank robbers whose exploits were widely reported and widely followed by the public. Bank robbers in particular were made folk heroes precisely because they were striking out at those whom a large part of the public blamed for the stock market crash and the depression.

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