The Great Depression Part 1

The Great Depression- End of Chapter 32

I. Causes of the Great Depression

A. Agricultural depression of the 1920s

1. Caused in part by wartime overexpansion which drove farm product prices down

2. Also caused be several years of extended drought in mid-1920’s

2. Many farmers lost their land and became tenant farmers and some sharecroppers

B. Industrial weaknesses

1. 1925 the housing industry dropped (housing is called “the barometer of the economy”) Think about how much stuff you have in your house! A decline in housing is a decline in a lot of businesses.

2. 1927 the auto industry dropped due to overproduction

3. Ripple effect – many are laid off and with no employment compensation (like today)

C. Mal-distribution of wealth and income

1. Profits from businesses not passed on to the worker (1/3 of the nation’s wealth controlled by 5%) and if something should happen to this group (like a stock market crash) then the entire country is in trouble.

2. Gains from productivity and profits should also have been plowed back into modernizing the factories but instead the rich people spent the profits on jewelry, vacation homes, winter retreats, off-shore accounts, etc.

D. Failure of international trade

1. Main problem was the higher Fordney-McCumber Tariff of 1922 (27 to 38.5% & the flex. arm) and the protectionist attitude of both Harding and Coolidge. When the US raises the tariff, so does Europe.

2. This slows down the world’s economy and will make the Depression last longer and be deeper

E. Florida Land Boom

1. Many Americans discovered South Florida and began to speculate on the land and also built homes, hotels, resorts, etc.  The conquering of Yellow Fever and the promise of air conditioning helped fuel this mad frenzy.  U.S. banks loaned millions to speculators.
2. In 1927 a hurricane hit South Florida and thousands of acres became swamps or were gobbled up by the Atlantic.

F. Overproduction and Drop in Consumer Spending

Technology such as the assembly line increased production.  By 1927 (“Saturation Point”) people had most of what they wanted.  Most people didn’t need but one washing machine or one radio.  Back lots filled up with inventory and this led to massive unemployment.  Obviously these unemployed people couldn’t buy stuff.  Ripple-effect!

G. Over and unsound speculation (land, bonds, and stock) and Easy Credit
1.  Many Americans had been buying cars, washers, refrigerators, etc. on the installment plan (like credit cards – buy now and pay later).  Also 1928 was a booming year on Wall Street – stock prices (not real values) soared as people bought stock “on the margin.”  This means that buyers only had to put down 10% to buy a share of stock.  The other 90% for the stock would either come from brokers loans or future profits once the stock was re-sold (sort of like short-selling today).  Adding to this frenzy was banks investing depositor’s money without their permission (a saving account not a mutual fund).  Banks and brokers were also selling foreign bonds to their customers – knowing full well that the bonds were absolutely worthless (does this sound familiar)?  Prices for stocks were not real, but had been driven up by speculation.
2. Banking houses in Europe (Austria) began to falter or collapse.

3. “Black Thursday” – Oct. 24, 1929 – Wall Street takes its first drop in years and a few very insightful or lucky folks sold out.

4. Friday and Monday – Oct. 25 and 29 – Major banks such as Morgan and Co. buy large blocks of stock and so do industrialists like Henry Ford who tried to bolster the stock market.

5. “Black Tuesday” – Oct. 29, 1929 – Wall Street crashes – 16.5 million shares in one day sold as brokers called in (“Margin Call”) all loans and advances.  Millions of dollars lost as investors tried to unload their stocks to pay off loans and to salvage an little for themselves.  Lives were ruined in that one day (NY hotel with 13 deaths).  Stock values fell by 40% in a month.  For example, American Can Company prices went from $181 to $86 per share, General Electric from $396 to $168, and Montgomery Ward from $137 to $49.

6. Savings accounts disappeared ($9 billion) and people made a “run on the banks” before they closed.

7. Over the next year, ordinary folks who had bought items with the new installment buying lost those. 85,000 businesses went bankrupt.

8. Depression spread to Europe and it was made worse by the fact that the U.S. could no longer loan money to Germany to pay Britain and France (Dawes – Young Plan) and those countriesa could no longer pay their debts to U.S. banks.

II. Hoover and the Great Depression (3 stages of “attack”)

A. Traditional Stage (done by other presidents)

1. Balanced budget

2. Reduce federal government spending

3. Keep US on the gold standard

4. Raise the tariff to protect American jobs and products (Hawley-Smoot Tariff of 1930 – which actually pushed the world into a greater Great Depression as it stagnated the world economies through tariffs walls, etc.

5. Wait out the depression since it’s just a natural part of the boom-bust cycle

B. Volunteer Stage (“Hooverizing” like during WWI)

1. Americans work together (labor, industry, and farmers) to fight it.

2. He relied on volunteer organizations like the Red Cross, churches, etc. to directly help the people.  He also believed that direct aid from the federal govt might bankrupt it, and he believed in “rugged individualism” where people are supposed to work harder when times are bad.  No one really wants a “handout” since it is disgraceful.

3. By 1932 most people saw this stage as a “do-nothing” stage and began to bitterly protest (Hoover Hogs, Hoover Blankets, Hoover Flags, and Hoovervilles).  Millions in this country went to bed hungry every night.  For example, many families in the Cotton Belt generally ate a meal every three days.  In the North the situation was as bad.  In Detroit in 1932, 1 person died from starvation every 7 hours.  Unemployment in some cities was incredible - by 1933, Toledo, Ohio's had reached 80 percent, and nearly 90 percent of Lowell, Massachusetts was unemployed.

4. Was anarchy or communism just around the corner?  It certainly looked this way.  First was the incredible at Henry Ford’s River Rouge auto plant in Dearborn, Michigan.  It involved Walter Reuther and the UAW.  As Ford moved to the V-8 engine, he forced 40,000 into unemployment.  The strike was led by the communists.  After tear gas and shots fired, many were killed and the communists paid for their funerals.

The other example would be the story of the Bonus Marchers.  They were WWI vets who were scheduled to get a bonus in 1944 for their service.  Led by Walter Waters from Oregon, a movement of WWI vets began headed to DC.  They wanted their bonuses early.  After being told” no” by the Senate, some left the Capitol, but hundreds of vets and their families moved across the Anacostia River (Southeast DC) and set up Hoovervilles on the mud flats. Hoover told US Army under Generals MacArthur and Eisenhower to make sure that the Bonus Army stayed in Anacostia and didn’t come into downtown DC.  MacArthur ignores Hoover’s orders and fires tear gas into the midst of the vets and their families.  Then, the tanks cross into Anacostia and the shanties are torched.  Lots of destruction and many were either killed or wounded.  To many around the nations, it appeared that America was moving toward anarchy and the country was falling apart.

C. Work Relief Program ($2.25 billion) – Gives up his “rugged individualism” to some degree.  Still a believer in Andrew Mellon’s “trickle down idea” of helping businesses, industry so that they in turn could help those on down the line.

1. This was revolutionary and “borrowed” by FDR later (early example of “pump priming”).

2. Reconstruction Finance Corporation - Loans to state and local governments to pay state workers, loans to banks, railroads, industries, etc. – but not direct relief such as what FDR would do!

3. His program was too little and too late – as unemployment went up to 25%.  Hoover stuck to his “trickle down” beliefs of helping businesses and state governments, but refused to offer direct aid to individuals.