The Crash of 1929

The prosperity of the 1920s rested on weaker ground than it seemed. Historians and economists weigh these problems differently, but most point to the same list.

• Overproduction and underconsumption. Factories could make more cars, radios and appliances than Americans could afford to buy. Many families had already bought on credit, and by the late 1920s sales of some goods were slowing.
• Unequal income. A growing share of the nation’s income went to the richest families, while many workers’ wages rose slowly. The rich saved and invested much of their money rather than spending it on goods.
• The farm depression. Crop prices had fallen after World War I and stayed low. Farmers owed money on land and machinery, and hundreds of small rural banks failed each year when they could not repay.
• Margin buying and speculation. Investors bought stocks on margin, often putting down as little as 10 percent and borrowing the rest from brokers. Many bought not for a company’s earnings but in the hope that prices would keep rising. Stock prices climbed far faster than profits.
• Weak banks. The country had thousands of small, independent banks. In 1929 more than 8,000 belonged to the Federal Reserve System and nearly 16,000 did not. There was no federal deposit insurance, so when a bank failed, its depositors could lose everything.
• The Federal Reserve. In 1928 and 1929 the Fed raised interest rates to slow lending for speculation. Many economists argue that this tight money slowed the economy before the crash, and that the Fed’s choices after the crash made things much worse.

The Dow Jones Industrial Average, a measure of leading stocks, reached a record 381.17 on September 3, 1929. Prices drifted down through September and early October. On Black Thursday, October 24, a wave of selling swamped the New York Stock Exchange. That afternoon a group of leading bankers, including Charles Mitchell of National City Bank, pooled their money and bought large blocks of stock at high prices to show confidence. The bankers’ pool calmed the market for a few days.

It did not last. On Black Monday, October 28, the Dow fell nearly 13 percent. On Black Tuesday, October 29, it fell nearly 12 percent more. Brokers sent margin calls to investors who had borrowed to buy stock. Those who could not pay were sold out, and the forced selling pushed prices down further. By mid-November the Dow had lost almost half its value.

Only a small share of Americans owned stock, but the crash hit far beyond Wall Street. Banks and businesses lost money, the rich cut their spending, and confidence fell. Many families stopped buying cars and appliances, and businesses stopped building.

Bank runs and failures. When people feared a bank might fail, they rushed to withdraw their deposits, and the run itself could sink the bank. Waves of panic swept the country in late 1930, in 1931 and in early 1933. On December 11, 1930, the Bank of United States, the fourth-largest bank in New York City, closed its doors; its name made many people think a government bank had failed. Roughly 9,000 banks failed from 1930 to 1933. As banks failed and survivors stopped lending, the nation’s money supply fell by nearly 30 percent from the fall of 1930 through the winter of 1933. With less money, prices, wages and spending all fell.

The collapse of world trade. In June 1930 Hoover signed the Tariff Act of 1930, known as the Smoot-Hawley Tariff, which raised taxes on many imports to protect American farmers and manufacturers. More than 1,000 economists had urged him to veto it. Other nations answered with their own tariffs. Scholars disagree about how much the tariff itself hurt, but world trade fell by about two-thirds from 1929 to 1934, and American exports to Europe fell from about $2.3 billion to under $800 million.

Unemployment. As sales fell, businesses cut wages and laid off workers. Unemployment rose from about 3 percent in 1929 to about 25 percent in 1933, roughly one worker in four. Many who kept jobs worked fewer hours for less pay.

The market bottom. On July 8, 1932, the Dow closed at 41.22, about 89 percent below its 1929 peak. It did not climb back to that level until November 1954.

Herbert Hoover had made his name organizing food relief in Europe during World War I and as an active secretary of commerce. He believed in voluntarism: business, charities and local governments, working together by choice, should solve problems without orders from Washington. In November 1929 he met with business leaders and asked them to keep wages up and avoid layoffs. Many did at first, but as sales kept falling, they cut wages and jobs.

Hoover did more than any earlier president to fight a downturn. He increased spending on public works, such as the dam on the Colorado River now called Hoover Dam. In 1931 he proposed a one-year pause on war debt and reparation payments to ease the crisis in Europe. In January 1932 he signed the law creating the Reconstruction Finance Corporation (RFC), which lent federal money to banks, railroads, insurance companies and other institutions. He hoped that keeping them alive would protect jobs. Critics said the money helped big business but did not reach the hungry.

Hoover firmly opposed direct relief, federal payments to the unemployed, which he called a “dole.” He feared it would weaken people’s self-reliance and unbalance the budget. Relief was left to private charities and to cities and states, which ran out of money. In July 1932 he signed the Emergency Relief and Construction Act, which let the RFC lend money to states for relief, but the amounts were small compared with the need.

The Bonus Army. In 1924 Congress had promised World War I veterans a cash bonus, payable in 1945. In the spring and summer of 1932, thousands of jobless veterans, many with their families, came to Washington to demand early payment. They camped in shacks, many on the Anacostia Flats. The House passed a bonus bill, but the Senate defeated it. On July 28 police tried to clear a group of marchers, and two veterans were shot and killed. Hoover then ordered the Army to clear the area. General Douglas MacArthur led troops with tanks, cavalry and tear gas, and went beyond Hoover’s orders by crossing the river and clearing the main camp, which burned. Photographs of soldiers driving out veterans hurt Hoover badly.

Homeless families built shacks of scrap wood, tin and cardboard at the edges of cities. People called these shantytowns Hoovervilles, a name that showed how many blamed the president. A newspaper used as a blanket was a “Hoover blanket,” and an empty pocket turned inside out was a “Hoover flag.”

Long breadlines formed outside charities, and churches and cities ran soup kitchens. Men left home to look for work, and many rode freight trains from town to town. Families moved in with relatives, put off marriage and had fewer children. The song “Brother, Can You Spare a Dime?” (1932), about a man who had built railroads and fought in the war and was now asking for spare change, became one of the best-known songs of the era.

• Women. Many women went to work or took in boarders and laundry to keep their families going. Women’s jobs as clerks, maids and teachers paid less, and many employers and school boards refused to hire married women or fired them, arguing that men needed the jobs more. A 1932 federal law led many married women in government jobs to lose their positions when their husbands also worked for the government.
• Black Americans. Black workers were often “last hired, first fired.” Their unemployment was far higher than that of white workers; in some cities about half of Black workers had no job. In the South, falling cotton prices drove many sharecroppers off the land. Some relief agencies gave Black families less aid or none.
• Mexican Americans. As jobs vanished, federal, state and local officials pressured or forced Mexicans and Mexican Americans to leave for Mexico in what was called repatriation. Estimates range from about 400,000 to more than a million people, and many of them, often children, were U.S. citizens. In 2005 California formally apologized for the state’s part in these removals.

By 1932 many Americans were desperate and angry. The Republicans nominated Hoover again. The Democrats chose Franklin D. Roosevelt, the governor of New York, who had started a state relief agency there. Roosevelt flew to Chicago to accept the nomination in person and promised “a new deal for the American people.” His plans were vague, and at times he even promised to balance the budget, but he spoke of helping “the forgotten man” and seemed willing to try new ideas.

In November Roosevelt won about 57 percent of the popular vote and carried 42 of 48 states, winning 472 electoral votes to Hoover’s 59. Democrats also won large majorities in Congress. Roosevelt would not take office until March 4, 1933, and in the long months between, the banking system slid toward collapse. Unit 4 follows what he did next. Unit 3 first turns to the Great Plains, where drought added to the crisis.

Economists and historians still debate why the Depression was so deep and so long. Two main explanations stand out, and many scholars combine them.

• The monetary explanation. In A Monetary History of the United States (1963), Milton Friedman and Anna Schwartz argued that the Federal Reserve turned a downturn into a disaster. It let thousands of banks fail and allowed the money supply to shrink by nearly 30 percent from the fall of 1930 through the winter of 1933, which pushed down prices, spending and jobs. In 2002 Ben Bernanke, then a Fed governor and later its chair, told Friedman and Schwartz that they were right about the Fed’s role and that the Fed was sorry.
• The demand-side explanation. Other economists, following the ideas of John Maynard Keynes, stress a collapse in spending. When consumers and businesses stopped buying and investing after the crash, sales fell, workers lost jobs and spent even less. The economist Peter Temin argued that the fall in spending came first and that money and banking were only part of the story. Others add the international gold standard, which tied countries together and spread the slump around the world.

Either explanation can be defended with evidence, and many scholars blend the two. As you read the rest of the course, notice which explanation the New Deal’s policies seem to follow.