The Great Depression in United States History (2 page)

Disposable income grew for most people. The average American now could buy more than necessities. He or she took advantage of that opportunity. Earlier generations encouraged savings. In the 1920s, saving money was almost considered unpatriotic.

Technological advances created new consumer goods. Vacuum cleaners, electric fans, toasters, and other luxury items became available to average Americans. Millions also bought the latest communications device, the radio.

Messages from the radio encouraged further consumption. Advertising became a major force in the 1920s. Through radio, newspapers, and magazines, companies reached customers in record numbers. They persuaded customers of the importance of the latest goods. A housewife did not just desire a refrigerator or a washing machine—she
needed
it.

Advertising affected the economy in another way. Companies who advertised wisely saw rapid growth in their business. Those who did not often went bankrupt. As a result, fewer, yet much larger companies controlled the American economy. By 1929, two hundred corporations controlled nearly half of American industry.

Few Americans bought these items with available cash. Instead, they used the credit system. Stores sold items for a small—or sometimes no—down payment. Buyers then paid the store a few dollars at a time, over a period of months. Customers got the goods right away. But the constant credit payments meant that few people saved much money. Those that did have extra money found a new place to invest it: the stock market.

The Stock Market

Businesses try to make money. Workers with money to spare often use those funds to try and make more money. These two groups come together in the stock market.

If a business is successful, it may seek more money so it can expand. One way to gain such money is by selling part of the company (stock) to outsiders. Each portion is known as a share of stock. Investors may buy (and later sell) this stock. Doctors, teachers, and plumbers invest in stocks. So do major financial institutions such as banks. Companies may use some profits to invest in other companies.

Buyers and sellers do not deal directly with the companies for stock. Instead, they conduct business at markets known as stock exchanges. Investment bankers buy all available stock from a company. They sell it or buy it back at the exchange. Investors likewise do not deal directly with the stock exchange. They act through agents known as brokers, who collect a fee from every stock sale. Brokers willing to buy stock meet with brokers willing to sell. They agree on a price, and that sale price is the stock’s market price. If trading partners cannot be found, a specialist representing the company buys or sells the requested stock.

The stock market offers no guarantees. If investors are interested in buying stock in a company, the value of that stock increases. This means more potential money for the investor and more money for the company. If fewer people are interested, the price falls. The investor loses money by selling the stock for less than he or she paid for it. The company loses because unsold stock or stock at lesser value means less money for other investments. Investors who buy stocks at low prices and sell at high ones can make a fortune. Those who unwisely put their money into falling stocks may lose their money.

Several American cities have stock exchanges. The largest, the New York Stock Exchange, is located on Wall Street in New York City. Before World War I, many Americans saw “Wall Street” as the home of greedy tycoons whose actions kept many people poor. In the 1920s, these same Americans had a different view. Now that they had some money, they wanted a share of the money made in owning stocks. The wealthy few still owned most stocks. But teachers, mail carriers, secretaries, and shopkeepers now began to own stock. “Taxi drivers told you what to buy,” millionaire financier and statesman Bernard Baruch recalled. “The shoeshine boy could give you a summary of the day’s financial news.”
¹

Most stock advisors used one word: “buy.” Stock prices rose throughout the decade as more and more people invested in RCA or U.S. Steel. Since people continually invested, stock prices kept rising. Corporate directors and chauffeurs alike welcomed the news. The stock market was making them rich—or so they thought.

Crumbling Blocks

More Americans were riding cars, buying appliances, and investing in stocks than ever before. They danced the Charleston, watched Babe Ruth slug home runs, and drank outlawed liquor at illegal taverns called “speakeasies.” To many, the 1920s seemed like a never-ending party.

But underneath this prosperity lurked serious economic problems. If no one dealt with these problems, the country could face financial ruin.

Distribution of wealth was far from equal. The rich were getting richer. The richest one tenth of one percent of Americans had as much combined income as the poorest 42 percent of Americans. While the average disposable income increased 9 percent during the 1920s, the richest one percent saw a 75 percent increase. Less than 3 percent of Americans had two thirds of the country’s savings, while 80 percent of Americans had no savings at all.
²

Productivity rose faster than incomes during the 1920s. This meant that factories were producing more goods than Americans could buy. These surplus goods could not be sold overseas. European countries were still devastated by World War I. Most had huge war debts to repay to the United States, which became the world’s leading creditor nation. Many countries in Africa, Asia, and Latin America were either European colonies or underdeveloped independent nations. Most of their citizens did not have the money needed to buy American goods.

Farmers did not share in the overall prosperity. For much of the 1920s, they suffered. Farmers had increased production to supply the Allies with food during World War I. After the war, Europeans no longer needed this American help. Yet American farms did not cut back on production. As new machines such as tractors became available, farmers could produce more crops using fewer people. But Americans could not eat everything the farmers produced. The farmers were growing too much food. Because of this overproduction, farm prices tumbled. While their profits became less and less, their debts remained the same or increased. Thus farmers were poorer than ever.

Many investors bought their stocks on margin. This meant they paid only a small percentage of the stock’s value when they purchased it. Someone buying a hundred dollars worth of stock, for example, might pay a stockbroker only ten dollars immediately. In return, the broker wanted collateral, some kind of assurance that the buyer had the money to pay his or her debt.

Often, the buyer used the stock itself as collateral. He or she promised to turn the stock over to the broker to cover money owed on it. If the value of the stock continued to rise, this would be no problem. But if the stock prices ever fell, the stock would be worth less money, and the collateral would be less valuable.

Banks took an active part in the stock market. Many used depositors’ money to finance stock purchases. In 1928, there were $5 billion worth of bank loans. Much of this money was lent to speculators who gambled on the price of stocks.

The stock market’s rise depended on a continually growing supply of money. But the American money supply was not limitless. After it reached its peak, disaster could occur at any time. Sooner or later, stock prices were bound to fall.

A similar type of financial disaster had occurred a few years earlier. In the years before air conditioning, much of Florida was considered too hot for most people. Thus, most of Florida’s land was undeveloped. But in the 1920s, speculators bought up Florida land and sold it at huge profits. These buyers, in turn, sold it for profit to others. Most people who bought Floridian land had no intention of living there. They only wanted to sell it to someone else and make money. Eventually, there were no more buyers. Those stuck with the land had worthless, undeveloped properties. Many of these buyers went bankrupt.

Many economists saw the country’s potential problems. One of them was Herbert Hoover, the United States secretary of commerce. He and other economists tried to advise the new president, Calvin Coolidge. But Coolidge would not listen. “The business of America is business,” he proclaimed.
³
“The man who builds a factory builds a temple. The man who works there worships there.”
⁴

Coolidge reacted to most problems by ignoring them and hoping they would go away. “If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you,” he once said.
⁵
The nation’s economy would turn out to be that tenth trouble.

In 1927, “Silent Cal” issued a brief statement. He chose not to run for president in 1928. A new chief executive would lead the United States. One man seemed the obvious choice.

The Great Engineer

If any man represented the American success story, it was Herbert Clark Hoover. He was the most respected man in Coolidge’s cabinet. His influence extended beyond the Commerce Department he headed. Hoover was known as the “Secretary of Commerce and Assistant Secretary of everything else.”
⁶

Hoover, born in Iowa, was orphaned at age nine. He then went to live with relatives in Oregon. The industrious Hoover worked his way through Stanford University, then became a mining engineer. By the age of forty, he was a millionaire.

During World War I, President Woodrow Wilson called Hoover to direct war relief efforts in Belgium. By most accounts, he did a superb job. After the war, he led relief efforts throughout Europe. The food and medical supplies he delivered saved millions of lives. Wilson’s assistant secretary of the Navy admired Hoover’s work. “I wish we could make him President of the United States. There could not be a better one,” said Franklin D. Roosevelt in 1920.
⁷

Hoover was a shy, serious man who lacked personal warmth. Even so, he won the 1928 Republican presidential nomination with ease. His opponent, New York Democrat Al Smith, was an outgoing politician whom Roosevelt dubbed “The Happy Warrior.” But voters did not choose their president by personalities in 1928.

Smith came from New York City. Hoover grew up in small towns at a time when most Americans lived in small towns or on farms. Al Smith was a Roman Catholic. Most voters were Protestants, and many harbored anti-Catholic prejudices. More important, Smith was a Democrat and Hoover a Republican. Hoover’s party held power during the prosperous 1920s, and Republicans gladly took credit for the good times. Humorist Will Rogers noted, “You can’t lick this prosperity thing.”
⁸
Hoover won by a landslide.

Financiers celebrated Hoover’s win. “There has never been a President with a fundamental knowledge of economics better than Mr. Hoover,” declared the
Wall Street Journal.
⁹
The Wall Street year ended a month later with a joyous confetti celebration. It was the greatest year ever for the stock market. Under Hoover’s leadership, 1929 promised to be even better.

1929

Since 1896, investors used the Dow Jones industrial average to measure the stock market’s strength. This number, the average price of leading industrial stocks, reached an all-time high in January 1929. The stock market and the economy looked healthy.

After January, the stock market acted like a roller coaster. Stocks rose, then they dropped, then they rose again throughout early 1929. The market took a small plunge in March and another in May. Sharp investors saw that the days of continuous growth were over.

Herbert Hoover took office in March 1929. “We shall soon . . . be within sight of the day when poverty will be banished from the nation,” he predicted during his 1928 acceptance speech.
¹⁰
Yet some signs showed otherwise. Many Americans still lived in poverty. The average worker’s earnings were only $1,280 per year. Farm incomes, particularly, were less stable than before. Farm prices had dropped 30 percent between 1925 and 1929. Building construction was no longer on the rise. Domestic car sales no longer rose. Everyone who wanted and could afford a car had already bought one. Textile mills and coal mines suffered massive layoffs.

The Federal Reserve Board is an independent government agency which helps oversee the nation’s banks. By raising or lowering interest rates to member banks, it can control the supply of available money. In 1929, board members were concerned that more financial trouble lay ahead. They feared that speculators were driving stock prices up beyond the real value of the products companies were producing. People were putting more money than ever into the market. Their money did not go to so-called “safe” stocks like utility companies, which promised small but steady returns. Instead, the speculators gambled on high-profit, high-risk stocks.

The reserve board urged its member banks to approve loans for legitimate business deals but not for stock speculation. Then it decided to raise interest rates. Board members hoped this action would curb stock speculation and allow businesses to build their way up to the value of their stocks.

At first, the opposite reaction occurred. RCA stock tumbled almost 10 percent. General Electric fell from $247 to $235 a share. Those losses were short-lived. Americans continued their stock-buying fever, and the market soared during the summer. The stock market was so popular that ocean liners installed brokerage offices. Passengers could buy and sell stocks and watch Wall Street doings from ticker tape machines.