The Beginnings of the Great Depression

The stock market crash of October 1929 marked the beginning of the worst depression in American history, from which the country did not really begin to rebound until the start of World War II. The human toll of the economic collapse is difficult to calculate. By 1933, more than 13 million Americans were out of work, tens of thousands of business had failed, and the number of farm foreclosures grew. The problems of agriculture were made worse by several years of drought that turned a good part of the Great Plains into a dust bowl and triggered an internal migration of destitute farmers to California. Blamed for the Depression, the Republicans lost control of both Congress and the White House for almost two decades. Elected in a landslide in 1932 for the first of his four terms, Franklin Roosevelt tried to bring the country out of the Depression through a combination of deficit spending and federal programs known as the New Deal.

Even before the stock market crash, there were signs that the prosperity of the 1920s was on shaky ground. As early as 1927, business inventories began to rise as consumer spending declined. The Federal Reserve Board tried to curb speculation by raising interest rates in July 1928, but the banks continued to make questionable loans. Agriculture had been depressed since the end of World War I, and both industrial production and the employment level dipped in mid 1929. The warning signs were there but went largely unheeded by the government and public alike.

The stock market crash. Stocks were bought on credit like many other commodities in the '20s. Millions of investors paid as little as 25 percent of the face value of a stock, and paid off the balance when the stock was sold after the price went up. This practice of buying on margin contributed to the rampant speculation in the market. Americans who had no knowledge of what to do in the market put their money in “investment trusts,” a forerunner of today's mutual funds, and let professionals determine which stocks to buy. Everybody profited as long as prices continued to go up, and the market value of stocks did climb from $27 billion to $87 billion between 1925 and 1929.

Stock prices began to decline in early September 1929, however. On October 24 (known as Black Thursday) prices fell sharply as investors unloaded their stocks. The following Tuesday, 16 million shares were sold — a record at the time — and the market dropped 43 points. Brokers called in their margin debts, which few could pay, and people who had been millionaires on paper (because of the value of the stock they held) became paupers overnight. Stories of ruined men jumping to their deaths from their office windows underscored just how terribly the crash affected investors. Despite pronouncements by President Hoover, John D. Rockefeller, and other business leaders that the economy was fundamentally sound, it was impossible to stem the panic in the market. By the end of October, $30 million worth of stock had vanished.

In the wake of the crash, caution replaced speculation in how people spent their money, which in turn affected the ability of the economy to recover. Installment buying in the '20s had masked the fact that most Americans did not earn enough to purchase the number of goods being produced. As consumer spending declined, companies cut back production and fired employees. Automobiles and construction, two of the boom industries of the 1920s, were among the first sectors of the economy hit. By 1933, about a quarter of the labor force was out of work. The nation's gross national product, the total value of goods and services, fell by more than 40 percent between 1929 and 1932. As borrowers defaulted on their loans, banks were unable to pay off depositors and were forced to close. Millions in savings were lost as a result of the banking crisis. Additionally, farm prices continued their decade‐long fall. Wheat that had sold for more than two dollars a bushel in 1919 was worth just over 30 cents in 1932. Even as thousands in the cities stood in bread lines and waited in soup kitchens for food, some farmers burned their crops and poured milk on highways as a form of protest and in a desperate attempt to drive prices high enough to cover their costs.

Hoover's response to the Depression. Direct federal relief to the unemployed ran counter to Hoover's strong beliefs about the limited role of government. As a result, he responded to the economic crisis with a goal of getting people back to work rather than directly granting relief. The President's Emergency Committee for Employment (later renamed the President's Organization for Unemployment Relief) was established in October 1930 to coordinate the efforts of local welfare agencies. As the Depression worsened, however, charitable organizations were simply overwhelmed by the magnitude of the problem, and Hoover tried new ideas to stimulate the economy. The Reconstruction Finance Corporation (RFC) (1932) provided railroads, banks, and other financial institutions with money for loans, and the Glass‐Steagall Act (1932) made getting commercial credit easier and released $750 million in gold reserves for additional business loans. The Emergency Relief and Construction Act (1932) provided funds to the RFC to make loans for relief to the states and included additional money for local, state, and federal public works projects.

Despite Hoover's efforts to revitalize the economy, the public blamed him for the Great Depression, calling the tarpaper‐shack shantytowns “Hoovervilles” and empty pockets “Hoover flags.” One group that thought it deserved better from the government — World War I veterans — made its opinions known in a dramatic way. In 1924, Congress had approved a cash disbursement to veterans that was due in 1945. During the spring of 1932, 15,000 veterans marched on Washington demanding an early payment of the bonus. When the Senate failed to approve a bonus bill, most of the veterans decided to go home. The 2,000 who remained encamped at Anacostia Flats and were forcibly removed by the Army at Hoover's direction at the end of July. The troops were under the command of General Douglas MacArthur and led by such officers as George Patton and Dwight Eisenhower. The spectacle of soldiers confronting unarmed veterans and their families with bayonets, tear gas, machine guns, and tanks did little for Hoover's popularity or reelection chances.

The election of 1932. With a noticeable lack of enthusiasm, the Republicans nominated Hoover for a second term. The Democrats, confident of victory, chose New York Governor Franklin D. Roosevelt. A distant cousin of Theodore Roosevelt, FDR (as he was popularly known) had served as Assistant Secretary of the Navy under Wilson and had been nominated as the 1920 Democratic vice‐presidential candidate largely on the basis of his name. In 1921 Roosevelt was stricken with polio, which left him paralyzed from the waist down. In 1924 he began his political comeback when he gave the keynote address at the Democratic convention, and in 1928 and 1930 he was elected governor of New York.

During his presidential campaign, although he promised the American people a “new deal,” Roosevelt did not outline a clear and specific program for responding to the Depression. Instead, his message was a combination of vague liberal and conservative principles. Roosevelt talked about helping “the forgotten man at the bottom of the economic pyramid” and suggested that the government was responsible for a more equitable distribution of wealth. At the same time, he also called for reduced federal spending and a balanced budget. Roosevelt was obviously extremely cautious and, given how unpopular Hoover was, the election was Roosevelt's to win. The results were a Democratic landslide: Roosevelt received more than 57 percent of the popular vote and 472 electoral votes, and the Democrats gained control of both houses of Congress with substantial majorities.