The Crash of 1929 and the Depression | ||||||||||||||||||||||||||||||||||||||||
The Great Bull Market and the Crash of 1929. As more Americans began to invest in the stock market, often at very liberal credit terms, the markets went up. Artificially fueled by increased credit purchases, consumer businesses produced and sold more and more, and the stock market kept pace. But the market was overbuilt, credit was stretched thin, and when the crash came it came with a huge thud. When capital dried up, buying slowed down, businesses laid off workers, further hurting consumer spending, and the economy spiraled downward to unimaginable depths. People who had never wanted for anything found themselves not only unemployed but unemployable. The situation was unprecedented, collectively and individually, and as the Depression worsened, the country floundered and people surrendered to despair. From March 1928 through September 1929, prices on the stock market rose spectacularly. Shares in companies such as General Electric, Radio (RCA), Montgomery Ward, and others seemed to have unlimited growth potential. Prosperity and the possibility of new wealth for millions of investor beckoned. People mortgaged their homes to get cash with which to buy stocks, and brokers encouraged clients to purchase stock on margin. A family with $1,000 in cash—a tidy sum in 1929—might be able to purchase $5,000 worth of stock with that down payment. The brokerage offering the margin purchase would doubtless have borrowed funds from a bank to finance the deal. As prices continued to rise, the structure became ever more shaky, and words of warning went unheeded. The chart below and discussion following give an idea of how things suddenly went terribly wrong. |
||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
People and the Crash Looking at the chart above, imagine yourself in a family in March 1928. You and your spouse are comfortable, you own a home, and you have a small amount of savings. But you keep hearing from neighbors, friends, business associates, or maybe you have even overheard gossip in a barbershop or on a train, about how much money people are making in the stock market—it has been been booming throughout the 20s. You decide, why not us? So you go down to the local bank and take out a mortgage on your home for about $4000 and add your savings to it. You find a stock broker and tell him you want to invest your money. Since everything is booming, he may suggest that with your $4000 in cash you may be able to buy two or three times that much stock by purchasing shares on margin. You end up buying $16,000 worth of stock with your $4000 cash—the broker loans you the $12,000 difference. Eighteen months later, if your stock behaves like the ones above, it has tripled in value. If you are smart, you sell a portion of your stock, pay off the loan to your broker, pay off your mortgage, and you are still way ahead of the game. Many people were not that lucky. Now let's suppose that you are the same couple, but you walk into the broker's office in September 1929 rather than in March 1928. You go through the same process and wind up buying $16,000 worth of stock on your $4000 mortgage and your $12,000 loan from the broker. (We are ignoring transaction fees and so on for simplicity.) Then the crash hits and it happens so suddenly that before you can gather your wits, the $16,000 worth of stock that you purchased is now worth a fraction of that. Your broker calls in his margin loan, as he must to cover his losses, but of course you can't pay him, and you lose your investment and maybe even your house. It is little comfort that the broker also loses everything, and even less comfort to you that the bank that loaned the broker the money that he loaned to you is also in serious trouble. The scenario above is oversimplified, but it does demonstrate in a simple way what happened to thousands of people. What is more complicated is the snowball effect that followed from the crash; the Depression started in 1929-1930, but also had roots in other causes. |
||||||||||||||||||||||||||||||||||||||||
Causes of the Crash and Depression The Great Depression was not caused by the stock market crash of 1929—that was only the trigger. The actual depression was caused by a combination of factors of international scope and great complexity. In the United States, for example, the consumerism of the 1920s and the increase in credit buying artificially accelerated the demand for consumer goods beyond what the real market factors would have told. With the stockmarket crash, as purchasing power shrunk and sales of consumer goods slowed, manufacturers were forced to pull back, and more people lost their jobs. As more became unemployed, the demand for consumer goods shrunk even further and the gap widened. Then banks that held mortgages were unable to collect them, and even if they foreclosed, finding buyers for the repossessed properties was difficult. Many banks ultimately failed, wiping out people's savings, thus making the picture worse. One problem led to another until the entire country was in the throes of a paralyzing economic slowdown. Although some parts of the country were relatively untouched, in others it seemed as though entire towns and villages were without any substantial income. The depression documents that accompany this section will give you some vivid insights into the human problems created by the Depression. Those who lived through it never forgot those times. Summary of some of the causes of the Depression:
|
||||||||||||||||||||||||||||||||||||||||
President Hoover and the Depression
Hoover’s administration actually he did a great deal to fight the Depression, but it was not enough. Hoover was basically conservative and could not grasp the depths of the crisis. He believed firmly in the American system, and felt that it could recover on its own with a little indirect help from government. By some standards Hoover’s action were bold, perhaps even radical, but far too little, as even the New Deal programs would be. Hoover opposed direct relief (the dole) and favored more or less voluntary approaches to recovery. Hoover was blamed for much that was not his fault, but he failed to meet the needs of the time and paid a steep price, politically and in terms of his legacy. Hoover’s programs included:
|
||||||||||||||||||||||||||||||||||||||||
Frederick Lewis Allen : CRASH! [From Frederick Lewis Allen, Only Yesterday, New York: Harper & Row, 1931, pp. 332-335. Allen's book, written in 1931, is a vivid look backward at the Roaring Twenties. His description of the Crash is famous.]
|
||||||||||||||||||||||||||||||||||||||||
|