Despite the booming U.S. economy of the late 1920s, Calvin Coolidge decided not to run for president again. In his place, Republicans nominated the president’s handpicked successor, popular World War I humanitarian administrator Herbert Hoover, to continue America’s prosperity. Democrats chose New York Governor Alfred E. Smith on an anti-Prohibition platform. Hoover won with ease, with 444 electoral votes to Smith’s 87 and with a margin of more than 6 million popular votes.
Soon after Hoover took office, the good times and successful run of the bull market came to an abrupt halt. Stiffer competition with Britain for foreign investment spurred speculators to dump American stocks and securities in the late summer of 1929. By late October, it was clear that the bull had been grabbed by the horns, and an increasing number of Americans pulled their money out of the stock market. The Dow Jones Industrial Average fell steadily over a ten-day period, finally crashing on October 29, 1929. On this so-called Black Tuesday, investors panicked and dumped an unprecedented 16 million shares.
The rampant practice of buying on margin (see The Politics of Conservatism, p. 17 ), which had damaged Americans’ credit, made the effects of the stock market crash worse. As a result, within one month, American investors had lost tens of billions of dollars. Although the 1929 stock market crash was certainly the catalyst for the Great Depression, it was not the sole cause. Historians still debate exactly why the Great Depression was so severe, but they generally agree that it was the result of a confluence of factors.
Ever since the turn of the century, the foundation of the American economy had been shifting from heavy industry to consumer products. In other words, whereas most of America’s wealth in the late 1800s had come from producing iron, steel, coal, and oil, the economy of the early 1900s was based on manufacturing automobiles, radios, and myriad other items that Americans could buy for use in their own homes.
As Americans jumped on the consumer bandwagon, an increasing number of people began purchasing goods on credit, promising to pay for items later rather than up front. When the economic bubble of the 1920s burst, debtors were unable to pay up, and creditors were forced to absorb millions of dollars in bad loans. Policy makers found it difficult to end the depression’s vicious circle in this new consumer economy: Americans were unable to buy goods without jobs, yet factories were unable to provide jobs because Americans were not able to buy anything the factories produced.
Consumer goods were not the only commodities Americans bought on credit; buying stocks on margin had become very popular during the Roaring Twenties. In margin buying, an individual could purchase a share of a company’s stock and then use the promise of that share’s future earnings to buy more shares. Unfortunately, many people abused the system to invest huge sums of imaginary money that existed only on paper.
Overproduction in manufacturing was also an economic concern during the era leading up to the depression. During the 1920s, factories produced an increasing amount of popular consumer goods in an effort to match demand. Although factory output soared as more companies utilized new machines to increase production, wages for American workers remained basically the same, so demand did not keep up with supply. Eventually, the price of goods plummeted when there were more goods in the market than people could afford to buy. The effect was magnified after the stock market crash, when people had even less money to spend.
Farmers faced a similar overproduction crisis. Soaring debt forced many farmers to plant an increasing amount of profitable cash crops such as wheat. Although wheat depleted the soil of nutrients and eventually made it unsuitable for planting, farmers were desperate for income and could not afford to plant less profitable crops. Unfortunately, the aggregate effect of all these farmers planting wheat was a surplus of wheat on the market, which drove prices down and, in a vicious cycle, forced farmers to plant even more wheat the next year. Furthermore, the toll that the repeated wheat crops took on the soil contributed to the 1930s environmental disaster of the Dust Bowl in the West (see The Dust Bowl, p. 33 ).
Income inequality, which was greater in the late 1920s than in any other time in U.S. history, also contributed to the severity of the Great Depression. By the time of the stock market crash, the top 1 percent of Americans owned more than a third of all the nation’s wealth, while the poorest 20 percent owned a meager 4 percent of it. There was essentially no middle class: a few Americans were rich, and the vast majority were poor or barely above the poverty line. This disparity made the depression even harder for Americans to overcome.
Reckless banking practices did not help the economic situation either. Many U.S. banks in the early 1900s were little better than the fly-by-night banks of the 1800s, especially in rural areas of the West and South. Because virtually no federal regulations existed to control banks, Americans had few means of protesting bad banking practices. Corruption was rampant, and most Americans had no idea what happened to their money after they handed it over to a bank. Moreover, many bankers capitalized irresponsibly on the bull market, buying stocks on margin with customers’ savings. When the stock market crashed, this money simply vanished, and thousands of families lost their entire life savings in a matter of minutes. Hundreds of banks failed during the first months of the Great Depression, which produced an even greater panic and rush to withdraw private savings.
The aftermath of World War I in Europe also played a significant role in the downward spiral of the global economy in the late 1920s. Under the terms of the Treaty of Versailles, Germany owed France and England enormous war reparations that were virtually impossible for the country to afford. France and England, in turn, owed millions of dollars in war loans to the United States. A wave of economic downturns spread through Europe, beginning in Germany, as each country became unable to pay off its debts.
At first, President Herbert Hoover and other officials downplayed the stock market crash, claiming that the economic slump would be only temporary and that it would actually help clean up corruption and bad business practices within the system. When the situation did not improve, Hoover advocated a strict laissez-faire (hands-off) policy dictating that the federal government should not interfere with the economy but rather let the economy right itself. Furthermore, Hoover argued that the nation would pull out of the slump if American families merely steeled their determination, continued to work hard, and practiced self-reliance.
Hoover made another serious miscalculation by signing into law the 1930 Smoot-Hawley Tariff, which drove the average tariff rate on imported goods up to almost 60 percent. Although the move was meant to protect American businesses, it was so punitive that it prompted retaliation from foreign nations, which in turn stopped buying American goods. This retaliation devastated American producers, who needed any sales—foreign or domestic—desperately. As a result, U.S. trade with Europe and other foreign nations tailed off dramatically, hurting the economy even more.
When it became clear that the economy was not righting itself, Hoover held to his laissez-faire ideals and took only an indirect approach to jump-starting the economy. He created several committees in the early 1930s to look into helping American farmers and industrial corporations get back on their feet. In 1932, he approved the Reconstruction Finance Corporation (RFC) to provide loans to banks, insurance companies, railroads, and state governments. He hoped that federal dollars dropped into the top of the economic system would help all Americans as the money “trickled down” to the bottom. Individuals, however, could not apply for RFC loans. Hoover refused to lower steep tariffs or support any “socialistic” relief proposals such as the Muscle Shoals Bill, which Congress drafted to harness energy from the Tennessee River.
The economic panic caused by the 1929 crash rapidly developed into a depression the likes of which Americans had never experienced. Millions lost their jobs and homes, and many went hungry as factories fired workers in the cities to cut production and expenses. Shantytowns derisively dubbed “Hoovervilles” sprang up seemingly overnight in cities throughout America, filled with populations of the homeless and unemployed.
In 1932, Congress took the first small step in attempting to help American workers by passing the Norris–La Guardia Anti-Injunction Act, which protected labor unions’ right to strike. However, the bill had little effect, given that companies were already laying off employees by the hundreds or thousands because of the worsening economy.
Farmers, especially those in Colorado, Oklahoma, New Mexico, Kansas, and the Texas panhandle, were hit hard by the depression. Years of farming wheat without alternating crops (which was necessary to replenish soil nutrients) had turned many fields into a thick layer of barren dust. In addition, depressed crop prices—a result of overproduction—forced many farmers off their land. Unable to grow anything, thousands of families left the Dust Bowl region in search of work on the west coast. The plight of these Dust Bowl migrants was made famous in John Steinbeck’s 1939 novel The Grapes of Wrath.
Middle-aged World War I veterans were also among the hardest hit by the depression. In 1924, Congress had agreed to pay veterans a bonus stipend that could be collected in 1945; as the depression worsened, however, more and more veterans demanded their bonus early. When Congress refused to pay, more than 20,000 veterans formed the “Bonus Army” and marched on Washington, D.C., in the summer of 1932. They set up a giant, filthy Hooverville in front of the Capitol, determined not to leave until they had been paid. President Hoover reacted by ordering General Douglas MacArthur (later of World War II fame) to use force to remove the veterans from the Capitol grounds. Federal troops used tear gas and fire to destroy the makeshift camp in what the press dubbed the “Battle of Anacostia Flats.”
Hoover’s inability to recognize the severity of the Great Depression only magnified the depression’s effects. Many historians and economists believe that Hoover might have been able to dampen the effects of the depression by using the federal government’s authority to establish financial regulations and provide direct relief to the unemployed and homeless. However, Hoover continued to adhere rigidly to his hands-off approach. This inaction, combined with Hoover’s treatment of the “Bonus Army” and his repeated arguments that Americans could get through the depression simply by buckling down and working hard, convinced Americans that he was unfit to revive the economy and destroyed his previous reputation as a great humanitarian.
When the election of 1932 rolled around, all eyes focused on the optimistic Democratic governor of New York, Franklin Delano Roosevelt. A distant cousin of former president Theodore Roosevelt, FDR promised more direct relief and assistance rather than simply benefits for big business. Republicans renominated Hoover, and the election proved to be no contest. In the end, Roosevelt won a landslide victory and carried all but six states.