THE CRASH AND THE GREAT DEPRESSION

The Crash

On 24 and 29 October 1929 prices on the New York Stock Exchange collapsed. The losses among 880 issues were estimated at between $8 billion and $9 billion. The "Great Crash" of 1929 ended a period of tremendous prosperity and inaugurated the Great Depression, but the crash and the Depression were not unprecedented. Since the Civil War, the American economy had suffered periods of depression every eight to twelve years. The last major depression, from 1893 to 1897, had been a period of enormous suffering and wide-spread political unrest; the economy had been through a smaller depression as recently as 1920-1921. Such depressions had been devastating, but often their impact varied by region, with the worst effects being localized. In the 1930s, however, the United States was financially unified as never before. Harvests in California affected markets in New York. Newspapers, magazines, radio, and cinema linked the nation from coast to coast. The dust bowl in Oklahoma was reported in Florida; hurricanes in Florida were reported in Oklahoma. A national media reinforced the perception that the Great Depression was unprecedented in its intensity and depth. Furthermore, after the prosperity and boosterism of the 1920s, the Depression seemed to many an unexpected and incredible calamity. Capitalism itself appeared to fail.

The Downward Spiral

Although the Great Crash was sudden, the Great Depression descended slowly, spiraling down to deeper and deeper depths of misery. Because of its gradual character, business and political leaders continually expected that the Depression, like those previous, would end, and that the economy would rebound. Repeatedly they discussed the Depression as part of the normal business cycle, advised the public to wait it out, and predicted the return of prosperity. In December 1929 the president of the National Association of Manufacturers, John Edgerton, remarked, "I can observe little on the horizon today to give us undue or great concern." "I am convinced we have passed the worst," announced President Herbert Hoover in May 1930. In January 1931 James Farrell, president of United States Steel, maintained, "The peak of the Depression passed thirty days ago." To the public—and to many businessmen—such pronouncements rang increasingly hollow. The economy only grew worse. Shares of General Motors stock, worth $212 per share in 1928, fell to $8 by 1931; Goldman, Sachs stock traded at 104 during the heyday of prosperity, and at 1 3/4 in 1932. Seventy-four billion dollars in investments were wiped out in the two years following the crash. Banks failed by the score, with 2,294 closing in 1931 alone, taking with them years of personal savings at a time when few businesses offered pensions to their workers. Nine million dollars in savings were wiped out by 1932. That same year twenty thousand businesses went bankrupt. By 1933 nearly a quarter of the labor force was unemployed. Manufacturing was at half the level it had been in 1929; foreign trade reduced by two-thirds. Wages fell nearly below the level of survival: in Pennsylvania sawmill workers received five cents an hour and general contract workers seven and a half cents an hour. Even baseball star Babe Ruth took a $10,000 pay cut. No depression, it seemed, had been as bad as the Great Depression. By 1932 rosy predictions of the return of prosperity became rare. Many businessmen conceded to a Senate committee that the Great Depression was not part of a normal cycle of boom and bust, and that they were helpless to change the situation, Myron C. Taylor of United States Steel told the senators, "I have no remedy in mind." Jackson Reynolds of the First National Bank echoed his sentiments, adding "I do not believe anyone else has."

Weaknesses and Wages

Although historians continue to debate the causes of the Great Depression, most agree that several economic problems combined to make the Great Depression especially severe. First, although the 1920s were a period of prosperity for many, several sectors of the economy were weak, especially agriculture and the coal and textile industries. These weak sectors acted as a drag on the rest of the economy. The relatively impoverished condition of American farmers, who averaged 40 percent of urban laborers' income, meant that they could not afford to buy the consumer products—-refrigerators, phonographs, and radios—that fueled the boom of the 1920s. Indeed, less than 10 percent of American farms were electrified. Similarly, the average wages of the majority of workers were too low. In the mining industry, for example, although output per man rose 43 percent between 1920 and 1929, yearly earnings fell from __BODY__,700 to __BODY__,481. Although wages in other industries rose generally in the same period 11 percent, corporate profits rose 62 percent. By 1929 fifteen thousand families in the United States with incomes above $100,000 per year received as much income as 5 million to 6 million families of poorly paid workers; that same year the top 5 percent of income earners in America held 33.5 percent of the nation's total wealth. Such differential distribution of wealth had several consequences. It meant that the majority of Americans, like the farmers, could not afford to buy the consumer goods of the period, leading to large-scale overproduction. This was not immediately apparent, as the market was driven to artificial highs, supported by wealthy investors. The high stock prices resulted in easy credit so that consumers purchased goods they could not really afford; banks and security firms, moreover, lent speculators as much as half of the cost of stocks, rocketing share prices far above the real worth of companies. The 1929 crash was a function of this overvaluation. In 1926, for example, production of automobiles began to exceed the ability of consumers to purchase them, but easy credit and stock speculation combined to obscure this fact until 1929. After that investors realized the real worth of their stock and began a disastrous sell-off.

AT&T AND THE SLUMP

The telephone industry benefited at first from the Depression, as phone calls between stockholders and brokers as well as those resulting from a sudden loss of jobs shot up. By December 1930 there were more than fifteen million Bell telephones in service, translating into comfortable earnings for AT&T shareholders. The following year, however, the number of lines began to fall as more businesses closed. Within another year another 10 percent of the phone services would be cut. The worst off within the Bell system was Western Electric, which eventually laid off almost 80 percent of its workforce. In 1933 business started picking up again; eighty-five thousand new lines were installed in the last quarter of the year, and within four years service stood at the same levels as in 1930.

Source:

John Brooks, Telephone: The First Hundred Years (New York: Harper & Row, 1975), pp. 187-197.

STAGNATIONISM AND TECHNOCRACY

Stagnationism and technocracy were two of the more popular schools of economic thought during the 1930s. Stagnationists such as economist Alvin Hansen of the University of Minnesota argued that the Depression was the result of capitalism reaching a full, mature stage. Stagnationists pointed to the closing of the frontier and a declining birth rate in the industrial world and argued that capitalism was done with, as Hansen put it, "the great era of growth and expansion." All the industries that could be built were built; all the rail that could be laid was laid; all the autos sold that could be sold. Mass unemployment was permanent, a consequence of mechanization. Along with the technocrats, the stagnationists believed that absent a sweeping technological innovation, capitalism had reached the limits of its growth and would now stagnate.

The technocrats were similar to the stagnationists in believing that capitalism had entered a "mature" phase; they were, however, less pessimistic about its future prospects. The technocrats believed a technological revolution was just around the corner and would spark a return of prosperity. The technocrats formally organized economists, engineers, and architects into a group called the Continental Committee on Technocracy. In 1933, under the supervision of Columbia University professor Walter Rautenstrauch, they produced what they termed the "Energy Survey of North America." The survey deployed some three thousand charts to prove that the Depression was a consequence of the mechanization of industry. After turn-of-the-century economist Thorstein Veblen, they advocated production for use, not profit; the replacement of politicians with engineers; the abolition of money (to be replaced by units of value they called ergs); the reduction of the workday to four hours; and lowering the retirement age to forty-five. Supposedly, such policies would promote efficiency and prosperity; how they were to be effected was unclear.

Both stagnationism and technocracy were something of intellectual fads, fading as the decade pressed on. Nonetheless, both movements contributed to the developing Keynesian philosophy of mainstream economists. Hansen himself eventually joined the Roosevelt administration and used modified stagnationist principles to press for countercyclical spending as a way of moving capitalism from its "mature" stage to its "advanced" stage.

Source:

John A. Garraty, The Great Depression (New York: Harcourt Brace Jovanovich, 1986).

Mismanagement and Trade

The crash itself reflected widespread mismanagement of the economy. The Federal Reserve system failed to stem the rise of easy credit by raising the discount rate it charged to member banks. Banking and finance were virtually unregulated, and this led to unsound practices, such as pyramiding industries (utility magnate Samuel Insull held sixty-five chairmanships, eighty-five directorships, and seven presidencies of major corporations), banks lending money for security purchases, and fraudulent investment schemes. Mismanagement was also evident in the American response to problems of world trade. World War I had badly disrupted world trading patterns. European nations, stunned by their strategic vulnerability during the war, responded by raising trade barriers after the conflict, seeking economic self-sufficiency and wrecking traditional channels of trade. The United States did much the same, passing the highest tariff in modern American history in 1922. The tariff was disastrous in the context of the postwar international debt structure. After the war the United States emerged as the leading creditor in the world, the holder of substantial debt owed to it by its wartime allies. Britain owed the United States $4.2 billion; France, $3.4 billion; Italy, __BODY__.6 billion; Belgium, $379 million; and Russia, $192 million. America's European allies had requested debt forgiveness after the war, arguing that full repayment of the debt would retard economic recovery. But American officials refused to forgive the debt, resulting in the Allies demanding war reparations from Germany, radically destabilizing the German economy, and, as predicted, retarding the general European recovery. Moreover, American trade dominance in Latin America, which the United States had seized during World War I, severely restricted a traditional market for European exports. And American trade barriers to European products meant that the Europeans could not trade their way out of debt with the United States. Accordingly, during the 1920s the United States was forced to make more loans—this time to Germany, so the Germans could pay reparations to the French, so the French could then repay their war debt to the Americans, at an interest rate double the original debt. Such a concentration of obligation in the United States naturally had an effect on Wall Street. As confidence in high return rates for American corporations and banks increased, more and more Europeans invested in American corporations and on the stock exchange, driving prices higher and increasing speculation. Gold, the medium of international transfers, concentrated in the United States, further exacerbating problems in international trade. The upshot was an international financial trade situation in the 1920s that defied economic common sense: the United States was deeply engaged in a pattern of international debt while refusing to open its markets to the type of trade necessary to repay those debts. Consequently the Europeans eventually defaulted on their obligations. In 1931 President Hoover placed a one-year moratorium on the repayment of war debts; in 1932 interallied debt and war reparations were repudiated altogether.

Solutions?

Because so many business leaders perceived the Depression as part of a natural business cycle, they offered traditional solutions to the problem—solutions that only made the Depression worse. Particularly disastrous was the passage in 1930 of the Smoot-Hawley Tariff, the highest levy in American history. An attempt to shore up the failing agricultural sector, the tariff led to retaliation from Europe and Latin America, further clogging world trade and destabilizing balance of payments. Business leaders, including Bernard Baruch, recommended balancing budgets and belt-tightening, which only furthered the deflationary spiral. A 1930 tax cut failed to stimulate the private sector, while it undermined federal revenues. A 1931 tax increase to balance the federal budget hit the private sector hard. Voluntary business associations continued to be threatened by antitrust laws and were, in any event, insufficient to stem the corrosion of an increasingly brutal market: competitive pressures in the oil industry nearly destroyed the business. President Hoover actually increased antitrust prosecutions in the hope that competition would alleviate the Depression, an error in judgment that moved many businessmen to oppose his election in 1932. He furthermore refused to approve large-scale agricultural subsidies, instead exhorting farmers to curtail their production voluntarily, an impossible request given the market during the Depression. His intention to remain tied to the gold standard as the basis of international trade led to gold exports and made money expensive, offsetting deflationary gains, especially after Britain went off the gold standard in September 1931. International trade arrangements, massive federal expenditures, agricultural subsidies, and the cartelizing of industry were called for; but many businessmen resisted such innovations, wedded as they were to an older economic philosophy. President Hoover was flexible enough to begin to introduce such programs in late 1931, but he did so reluctantly, afraid of undermining the individual work ethic and the operations of the market-place. His philosophical objections made little sense to millions suffering physical deprivation. In 1932 Hoover was voted out of office, making way for Franklin Roosevelt and his New Dealers, who would attack the Depression with a series of more distinctly innovative economic programs.

Sources:

Robert Heilbroner and Aaron Singer, The Economic Transformation of America (New York: Harcourt Brace Jovanovich, 1977);

William Keylor, The Twentieth-Century World: An International History (New York: Oxford University Press, 1984);

Joan Hoff Wilson, Herbert Hoover: Forgotten Progressive (Boston: Little, Brown, 1975).