Buying on the margin Owning shares was made even easier because they could be bought on credit. The stockbroker would accept around a 10% deposit called a ‘margin’. With luck, the shares could be sold before the rest had to be paid. A big profit could be made for a very small investment. Brokers took this risk because they were so confident that the prices of shares would keep on rising.
The share bubble of speculation While confidence remained, the share boom continued. By 1929, people from all sections of society all seemed to be playing the market. Billions of dollars of investment had inflated the price of shares way beyond their true value. For example, shares in the Radio Corporation of America cost $85 each in early 1928, and by September 1939 they were worth $305 each. Once confidence went, the share bubble of speculation would burst, If prices began to fall and stockbrokers and investors lost confidence they would want to sell their shares. Many banks had accepted shares as security for loans. If the value of the shares were to fall below the amount of the loan, the banks would demand repayment in cash.
Source 2
The crash
By the summer of 1929, stocks of unsold goods were piling up in many factory warehouses. As a result, many investors began to sell their shares and rumours began to circulate that profits in industry were falling. The British financial empire of Clarence Hatry fell at this time, and enterprise which had been financed by debt. This depressed the mood of the market. There were rumours that the Federal Reserve Board were going to tighten credit. As big investors sold, so lenders began to call in credit from brokers, who in turn put the squeeze on clients, who would now have to sell their shares in order to pay their brokers.
Black Thursday
As investors continued to sell their shares, share prices continued to fall until, on 24th October 1929, panic hit Wall Street. As soon as the Wall Street gong was sounded at 10.am the rush to sell began. In the 1920s, an average wall Street day would involve the trading of about 2-3 million shares a day; a busy day might raise that to 5 million. On Black Thursday nearly 13 million shares changed hands and millions more were offered for sale but did not find buyers.
Prices started to plunge. The shares of Union Cigar, for example, fell from $113 to $4 in one day! The president of the company committed suicide by jumping from the ledge of a New York hotel. The news of such falls in prices quickly spread throughout American, and more and more people instructed their brokers to sell.
On Black Thursday, six of the richest bankers in New York met to decide on a plan to calm the market and reassure the investors. They decided to send six banking officials to spend $240m on a selection of shares. They hoped this would restore confidence. For a while the plan seemed to work and on 25th October prices, though still low, stopped falling.
The leader of the six bankers, Thomas Lamont, from Morgan’s Bank, said ‘There has been a little distress selling on the stock exchange.’
Terrifying Tuesday
On Monday 28 October, the selling continued and 9 million shares were traded.
But the worst day of all was Tuesday 29th October. Desperate investors and brokers were trying to raise cash to pay bank loans and many of the shares bough by the bankers a few days earlier were now back on the market. The teleprinters could not keep pace with the frantic activity. In one day, 16 million shares were sold. Hundreds of thousands of investors were ruined. $8,000,000,000 was lost by shareholders.
In the days and weeks that followed, prices continued to drop. By 13 November, they had hit their lowest level - total losses amounted to $30-40,000,000,000. It was far too late to repair the damage done by the Crash.
Prices of shares in cents
It would be as well to remember that even after the October crash, what actually had been wiped out were the gains of the first nine months of 1929. Even after the crash experts failed to see the damage that had been done.
Depression
The Wall Street Crash had a devastating effect on the US economy and that of the rest of the world. Only a small proportion of Americans actually owned shares - less than 1% of the population. Yet the Crash affected the vast majority of American people because there were serious weaknesses underlying the US economy.
However, you must be careful in saying that the crash led to the depression. This is unlikely. American business was simply too big and too diverse to be affected by the crash in that way. It is likely that depression was already well on the way by the October crash - one might even call the crash an effect of the depression, and something which then made the depression much, much worse.
Unemployment
Money for investment dried up. Workers lost their jobs as more and more companies went out of business. As unemployment rose, people had less money to spend. There was, therefore, less demand the products and more companies went under. This was known as the cycle of despair. Government policy in the 1920s and the unevenness of the economy meant a quick recovery would be impossible.
At first it was hoped the situation might improve, but when it did not the jobless reached enormous proportions. In Chicago 40% were out of work. By 1933 nationally, 14m people were out of work. Bizarre stories went round - for example, in some areas men started forest fires in the hope of being hired to put them out.
Most employers were slow the fire workers and only did so when there was no alternative. But, more and more were force to lay off workers, reduce wages and make other savings. More than 60% of the workers in Chicago who kept their jobs had their wages cut by a half or more.
The unemployed suffered not only poverty but misery and despondency.
Poverty and Despair
Some men begged or became hoboes, riding the freight trains in search of work. Transient camps were set up made of homeless and unemployed people.
Others relied on soup kitchens and breadlines - but this private charity soon ran out. Al Capone opened one of the first breadlines to try and gain publicity after the St Valentine’s Day massacre. Hunger and sickness grew over the poor diets people were now living on. People ate berries, wild plants and begged. Even garbage cans were raided.
Families faced problems as a result of overcrowding. The marriage rate fell, husbands felt like failures if they could not find work and women who worked were accused of taking men’s jobs. Many were fired a practice which was endorsed by the major union, the Federation of Labour. Married women in particular found getting work hard.
While people in the towns went hungry, farmers left crops unharvested because prices were so low. Miners starved whilst coal stocks piled up, and their children lived on weeds and dandelions.
Brought up to believe that anyone could ‘make good’ if they really tried, Americans felt more ashamed of being destitute than rebellious about it. Some did find work - ion sweatshops for $1.10 per week or 5 cents an hour in the sawmills of Connecticut.
Table of despair
Industrial production (baseline 100)
Aug 1929 114
Mar 1933 54
Average weekly earnings $
1929 25
1932 17
The number of suicides also rose alarmingly. In 1926 there had been 12.8 and in 1929 14.0 and by 1932 17.4 per 10,000 of the population. A popular joke at the time read ‘Did you hear the one about the man who rented a hotel room. The clerk asked him if it was for jumping or sleeping?’
End to confidence
Despite the relatively low number of players on the stock market, it symbolised prosperity and so when it crashed, so did confidence in the economy in general. This in turn led to a run on the banks and lack of investment.
When it was discovered that the House of Morgan kept a preferred list of influential customers to whom it sold securities below market price, the belief of honour in corporate life flew out of the window.
Bank failures
As the effects of the Crash took hold, millions of savers wanted their money back from the banks either to pay back debts or because they needed the money now. But the banks had problems of their own. Many had lent unwisely to stockbrokers, unsound companies and private investors. When they called their debts in, many borrowers could not pay them back.
The smaller banks were the first to go bankrupt. Within three years, thousands of larger concerns had also failed. By 1933, the American banking system had virtually collapsed. About 15% of people’s life savings had been lost (there was no system of insuring their deposits) and millions of Americans had withdrawn their money and overseas investors had withdrawn their gold deposits. Without banking, business confidence, and investment was at a standstill so no recovery was possible.
Bank failures
Hoovervilles, shanty towns
Over a million of the unemployed had become homeless because they could not pay their rents or mortgages. Banks had taken possession of their homes. Now they felt anger and humiliation and blamed Hoover’s government. They lived in shanty towns on the outskirts of cities. They built their new homes from packing cases, scrap metal, sacking, wood, old car seats and burnt engine oil for warmth on cold nights. These settlements became known as Hoovervilles. People got their food from rubbish tips and charity kitchens. Others begged. Many slept rough in doorways, parks and subways. Some of the shanty towns were ten miles long; whole families might live in packing crates and rusted-out car bodies.
Hoover Stew was the thin soup distributed from soup kitchens. Hoover leather was the cardboard with which people patched the holes in their shoes.
Source 5
A Hooverville in Central Park, New York. In the background are luxury blocks of flats.
The 1932nd psalm went:
‘Hoover is my shepherd, I am in want,
He maketh me to lie down on park benches,
He leadeth me by still factories,
He restoreth my doubt in the Republican Party.’
Hoover’s humanitarian image was lost (he had been praised before becoming president for his good works). Self-hep had broken down.
Blacks
Blacks were already the most deprived section in American society. Those who lived in the slums of the northern cities and in the farming areas of the south suffered terrible hardship. Unskilled workers suffered most of all. 52% of blacks were unemployed by 1932. Relief pro
The farmers
Life was already tough for the farmers - but it got worse. While the poor starved in the cities, food rotted in the countryside as the farmers produced too much - people simply could not afford to buy it.
Banks were not sympathetic. If farmers could not pay their mortgages, their land was repossessed. In farming states, like Iowa, farmers joined together and tried to drive away the bailiffs who came to evict them with shotguns and pitchforks. The Farmer’s Union organised strikes to stop food getting to market - in the hope that prices would rise. They blocked roads and marched through the streets with placards announcing ‘In Hoover we trusted, now we are busted’.
An additional problem for the farmers was the Dust Bowl. Between 1930 and 1936 the south and midwest suffered a serious drought. The area had once been animal grazing land but during the First World War farmers were encouraged to change to arable farming and to grow crops that could be sold abroad. This continued after the war.
Areas affected by the dust storms
By 1930 much of the land had been over-farmed and was already losing its fertility. Then came year after year of hot summers, driving wind and little rainfall. Without its grass covering, the top soil turned to dust and the wind whipped the dust into storms which smothered everything in sight. Some of these storms were known as black blizzards. The top soil was lifted and carried eastwards leaving dunes of grit and sand behind. The soil was dropped on eastern states as far as New York and Washington DC, New England and ships in the Atlantic. It lasted for seven years. 60% of the people living in the dust bowl region lost their farms. By 1936, over 20m hectares of land in Kansas, Oklahoma, Texas, New Mexico and Colorado had become like a desert. Thousands of farmers were ruined.
Farmers from the south and mid-west moved away in droves - over 350,000 - after the dust storms of the early 1930s. They looked for work and better land to farm, especially after the dust storms, which often wrecked land and homes. Many left for California where they hoped for a better life. But these Oakies and Arkies (from Oklahoma and Arkansas) often received a hostile welcome. Many resented them and feared they were stealing their relief cheques. Many believed that they were responsible for their own problems. Migrant women were accused of having babies in order to collect relief money.
In 1939 the novelist John Steinbeck spent months living with some of these migrants in California and wrote a novel about his experiences called The Grapes of Wrath. The book tells the story of the Joad family who travel from Oklahoma to California for a new life. It was later turned into a highly successful film. The Joads move from place to place looking for work but have little success. Some fall ill, some died. At one point they are in a government camp overseen by officials elected from the migrants. Here conditions were better. In other areas they saw food being thrown away whilst they themselves were constantly hungry.
The Bonus Army
One protest which did worry the Republican government was the Bonus Army march on Washington. In 1932 over 20,000 of the ex-servicemen who had fought in the First World War decided to demand bonus payments that had been promised to them. This bonus of a few hundred dollars was scheduled for payment in 1945. These veterans wanted their money now as many were facing starvation. Thousands of the these Bonus Expeditionary Force (BEF) veterans marched on Washington from all over America. They set up a gigantic Hooverville opposite the White House on the Anacosta Flats.
US Congress did not vote to pay the bonus immediately but did vote money to help the veterans pay their way home. Most left, but between 2,000 and 4,000 remained. President Hoover and the government were disturbed by these ‘troublesome veterans’. They declared that they were led by communists and revolutionaries. After two BEF men were killed in a clash with police, Hoover ordered the army to move them out (actually this was the idea of General McArthur, but Hoover took full responsibility). On 28 July 1932, four troops of cavalry (1,000) led by Major George Patton drove the veterans out of Washington and burned their Hooverville camp. Two babies died of tear gas and many were injured. Tanks and machine guns were also used. To many Americans, it seemed that the army was a declaration of civil war by the government (and possibly a communist one at that if gov propaganda was to be believed) against its own people, but others were disgusted by Hoover’s actions.
Was American now close to revolution? The New York Evening Post described is as ‘easily the most threatening situation the Depression had brought upon America’. Historians suggest that American people did not have much sympathy for the marchers which allowed Hoover to get rid of them relatively easily.
(Note that the bonus army took to marching again when FDR took office - and they were provided with camp sites and visited by the first lady.)
The rich and the depression
Large numbers of factories and shops were left empty and some streets were quieter because people could not afford cars, even some of the rich had to make cut-backs. Rich wives who had never had to cook were forced to sack servants. However, many hardly felt any effects at all. A one resident in Manhattan put it ‘I never saw one bread line, never in New York. If there were any, they were in Harlem or down in Greenwich Village. They were never in this section of town. The ‘New Deal’ meant absolutely nothing to me except higher taxation. The thirties were a glamorous, glittering moment.’ Certainly Hollywood boomed as people tried to forget their troubles in the musicals and other extravaganzas of the time.
Any positive signs?
It might be argued that people pulled together, for example the soup kitchens, the breadlines. There are cases where farms put up for auction received deliberately low bids in an effort to return them to the original, dispossessed owner.
The Empire State Building was begun in 1930 which many saw as a symbol of hope - 102 storeys high and possessing 67 lifts. The Boulder (alter Hoover) dam was started in 1930 as part of a public works scheme.
The laissez-faire response: gov and the Depression
All three presidents in the 1920s were Republicans who firmly believed in laissez-faire - Harding, Coolidge and Hoover. Laissez-faire is an economic theory which holds that governments should interfere as little as possible in the natural operation of trades and the relations between employers and their workers. Left to itself, the economy would run itself to the benefit of everyone. This theory fits in with the American belief in individual freedom and meant that in 1929 there was no need to do anything because in time, market forces would bring about recovery. Hoover was a self made millionaire from the mining industry who believed people should look after themselves and that as far as possible the gov should not interfere in business or people’s lives. He was not an unkind man - he had helped Belgian refugees in the war. But he favoured voluntarism - ie, voluntary cooperation of private companies and government.
In 1931 Henry Ford said: ‘The average man won’t really do a day’s work unless he is caught and can’t get out of it. There is plenty of work to do - if people would do it.’
The policy of the government was to leave the economy alone - so there were no unemployment benefits or welfare payments for the poor. In May 1930 Hoover said they had been through the worst and reminded the people that prosperity would only happen if businesses were not told what to do by the government. Hoover strongly believed in ‘rugged individualists’ who sorted out their own problems without the government’s interference. He was a self-made man himself. He insisted that some special ‘force’ had upset the free market mechanism; there was no flaw in the mechanism itself. If people would only cheer themselves up the economy would miraculously pick up.
It was also an important part of rugged individualism that economic freedom went hand in hand with political freedom. Hoover believed that once governments started telling business what to do the next thing would be people would be told what to think. There was a great danger in allowing a bureaucratic state to take over people’s lives.
Charity was unable to deal with the crisis, though. In 1932 the Red Cross could only give 75 cents a week to each needy family. Charities could only supply 6% of necessary funds by 1932 and in Michigan, state funding was reduced from $2m to $832,000 from 1931 -2.
Voluntarism
Hoover relied on his own belief in voluntarism. He asked business leaders to maintain wages and jobs. Municipal and state governors were asked to create public work schemes. In October 1930 he created the Emergency Committee for Unemployment to coordinate the voluntary relief agencies. In 1931 the National Credit Corporation, a private bank, lent money to smaller banks to provide business loans. He also increased government spending and cut taxes. This had to no effect. The Hawley-Smoot Tariff, a tax on imports, was introduced in 1930. This did not help, however, as foreign countries raised their tariffs in retaliation. Consequently fewer American goods were sold abroad. In fact most historians see it as the very worst thing that Hoover could do and 1,000 economists signed a petition to try and stop its implementation.
He did create several agencies to deal with poverty around 1932, possibly as a result of the election in November.
- President’s Organisation for Unemployment Relief (POUR). However, POUR did not spend government money, but only money donated to it to help the unemployed.
- Glass-Steagall Act allocated $750m of gov gold reserves for loans to private businesses.
- Agricultural Marketing Board 1929. A nine-person marketing board to set up cooperatives to store and dispose of farm surpluses in an orderly way. But there was no pressure to restrict production. Because it bought surpluses at above the market prices it was accused of encouraging over-production. Hoover vetoed a suggestion that it should restrict production.
- Taxes were reduced to give the population more purchasing power. This was ineffective because many people were unemployed and had no income to pay less tax on.
- The Reconstruction Finance Corporation was set up to lend $2,000m to banks, companies and state governments. This funded unemployment relief and public works projects and achieved some success under the next government. 90% of loans were to small and medium sized banks, but the amount of funds went to big banks, eg the Central Republican National Ban and Trust Co received $90m (its chairman was on the RFC board). The law had to be changed to allow the RFC to actually lend federal money and by the Emergency Relief and Reconstruction Act of 1932 the RFC could lend $1.5bn to state to finance public works. But states had to be almost bankrupt and public works had to produce revenue to pay off loans. Republicans were angry nevertheless that Hoover was prepared to go this far.
- The Federal Home Loan Banks were established to discount mortgages - but they were too small scale and relied on voluntarism on the part of the banks. It fell apart when bankers refused to cooperate.
- The Presidential Emergency Committee on Employment advised local relief programmes.
- Hoover moratorium on world debt - too late in 1931 to save the European economy.
- National Credit Corporation, 1931. Set up by bankers to help failing banks. Did little good as would not lend to failing concerns. Problem of voluntarism - again banks putting own interests first.
- Federal Farm Board which failed to halt the slide in farm prices because the board was attempting to support crop prices without restricting production and was swamped by surpluses. Voluntary price stabilisation failed - as the gov removed surpluses so they piled up again.
Problems for Hoover
It was all too little too late. It is rather unfair to suggest that Hoover would do nothing, but never would he give direct help. Congress allocated $47m after the 1930/1drought but even that was to be offered as loans. Not only that, Hoover was not helped by other factors: state governments would not keep up their spending, farmers would not cut production, employers sacked people and there was so little confidence in the economy that people would not take out loans or invest. The Republican belief in a balanced budget also stopped them doing more as did other economic conventional wisdom of the day.
Also, the gov had limited instruments available to it. There was no national education, police or proper federal bureaucracy. Very few people paid federal income tax. The only federal agency in most towns was the post office and federal expenditure 1929 was 2.5% of GNP and a third that of state governments. Even a 50% rise in the federal budget would have been a ripple. There was no gov bank and no control over the monetary authorities or Federal Reserve Bank which supervised private banking. Thus there was no gov department to channel funds for welfare, and hence in 1932 when surplus wheat was released it had to be done through the Red Cross. The tradition whereby communities looked after residents in distress was the product of agricultural society, when hardship could be expected to be local and contemporary.
Year Economic factors and statistics Government action
1929 Unemployment 3.2% Agricultural Marketing Act
GNP $203.6 billion
Growth rate 6.7%
October 1929, price of shares
fell by $14 billion
1930 Unemployment 8.9% Voluntarism, e.g. conferences
GNP $1 83.5 billion to try to dissuade business
Growth rate -9.6% from laying off workers.
Serious drought SE of Rockies Hawley Smoot Tariff.
$49 million given in loans to victims of the drought.
1931 Unemployment 16.3% Moratorium on collection of
GNP $169.5 million war debts for 18 months.
Growth rate -7.6% National Credit Corporation set up with capital fund of $500 million.
1932 Unemployment 24.1% Federal Home Loan Bank Act.
GNP $144.2 billion Reconstruction Finance
Growth rate -14.7% Corporation set up with funds of $2 billion.
Emergency Relief and Construction Act.
Dispersal by force of ‘Bonus Army’.