The Great Depression
I am convinced we have now passed the worst, and with continued unity of effort we shall rapidly recover. ~ US President Herbert Hoover in May 1930
Though the US stock market crash of October 1929 is often pointed to as causing the Great Depression, its roots go much deeper.
With Europe exhausted by the Great War, America emerged the victor. The US bankrolled European recovery while becoming the richest country in the world.
Britain should have done well, but it committed monetary suicide by returning to the gold standard in 1925 at pre-war parity: an anachronist move that led to overvaluation of the pound and a consequent fall in exports.
American exports and surging gold imports fueled massive consumer credit expansion in the 1920s. Cheap and easy credit was available for home loans and all manner of durable goods, such as furniture and appliances.
The US government foolishly fed a booming economy with more liquidity. 1922–1924, the Federal Reserve bloated the money supply while lowering interest rates to 3%. Over a half billion dollars was injected into the US economy just to help Britain return to the gold standard. In 1926, the Fed briefly raised interest rates to counter surging speculation in real estate, but quickly reversed itself. The return to easy-money lubrication was responsive to pleas from European finance officials: the continent was still struggling economically.
American banks expanded their balance sheets nearly 3 times over between 1914 and 1929, from $20.8 billion in 1914 to $58.5 billion in 1929.
Traditional banks had competition. General Motors created a finance subsidiary (GMAC) in 1919 to lend to installment purchasers of cars. (General Motors Acceptance Corporation (GMAC).) GMAC loans went from $25.7 million in 1920 to $400.8 million in 1929: a nearly 16-fold expansion in 9 years.
The Florida Bubble
The first euphoric bubble to blow and burst in the 1920s was not on Wall Street, but in Florida. Abetted by the fame of Miami Beach as the playground of the rich, a real estate boom was fueled by eager investors who had never even set foot in the state.
Italian businessman and con artist Charles Ponzi, already a convicted forger and larcenist, began a new career selling swampland. The Florida legislature helped by passing laws to support the land boom.
The inevitable collapse came in 1926, as the supply of fresh and gullible buyers dried up. An unusually cold winter in 1925, followed by an extremely hot summer, frightened away many potential investors, having cast doubt on the state’s polished reputation as “heaven on Earth.” There was a futile rush to get out.
At the time, 2 vicious hurricanes from the Caribbean in the autumn of 1926 were held to be at fault for the bust. Thousands were left homeless while thousands more were relieved of their wealth.
The stock market boom preceding the great 1929 crash started in 1924. The rise was at first justified by economic conditions, but in 1927 the mood morphed into a speculative fever.
At its peak, there simply weren’t enough stocks to feed demand. So, more were made, much in the way that funny money would be made out of securities in the 1st decade of the 21st century. Stocks lost touch with tangible valuation (a perennial trend that has never gone out of fashion, as witnessed at the end of the 2010s).
During the spring of 1929 share prices made large leaps, briefly interrupted by profit-taking. The euphoria held for only a short while. By the time the autumn leaves started turning, uncertainty hung in the air.
In early March, respected banker Paul Warburg warned of impending disaster from “unrestrained speculation.” The reaction was vicious. Warburg was held to be obsolete in his views. He was “sandbagging American prosperity.” Quite possibly he was himself short in the market. An overtone of anti-Semitism wafted in the responses.
In September, American economist Roger Babson chimed in with sentiments selfsame to Warburg. Babson warned of a crash that “may be terrific.”
Factories will shut down. Men will be thrown out of work. The vicious circle will get in full swing and the result will be a serious business depression. ~ Roger Babson
The great financial houses at the time pounded Babson with grave rebuke. The financial newspaper Barron’s said Babson should not be taken seriously by anyone acquainted with his past forecasts of “notorious inaccuracy.” Nonetheless, Babson’s blast caused a sharp break in the market.
Sensible people thought the boom would be over before the close of 1929, simply because, like other speculative deliriums before it, it was too good to last.
By the time stocks came crashing down, ordinary folk had piled in, trying to get rich quick. Many did so on borrowed money.
Just as speculation was frothing in the spring of 1929, the real economy in the US was slowing down. In March, house building and manufacturing started to slow down. The thunderclap came as a sudden acknowledgement of an already apparent economic trend: that the Roaring Twenties roared no more.
A long-term decline in the prices of agricultural commodities that began in 1925 had greatly reduced the buying power of farmers. This dilemma had been caused by overproduction after the War, as European battlefields gave way once again to cultivation. Mechanization of agriculture – tractors – increased crop productivity, fueling the oversupply.
A collapse in international trade was caused by a downward spiral in demand which had been egged on by governmental policies: most notably Europe’s return to the gold standard, which incurred deflation. This is what prompted Europe to ask the US for more liquidity. Accommodation by the Federal Reserve in 1927 blew the bubble as big as it could be.
The stock market crash started on 24 October 1929. Pauses were brief as the US market plummeted over the next month, then kept stumbling downwards well into 1932.
1st-rate securities fell alongside the fodder. Discrimination went out the door.
From the initial crash to 1935, US stock prices plunged 89%. The fall was repeatedly briefly interrupted by bear-market bounces.
The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis. ~ President Herbert Hoover on 26 October 1929
Once the crisis hit, governments in Europe and America made it worse.
Prosperity cannot be restored by raids upon the public Treasury. The budget should be balanced. ~ President Hoover
The Tariff Act of 1930, known via its Congressional sponsors as the Smoot-Hawley Act, was signed into law by President Hoover. It raised the average US industrial tariff from 37% to 48%.
The Smoot-Hawley Act was akin to the proverbial straw that broke the camel’s back. It was merely symptomatic of government policies designed to restrict trade and dampen demand.
The Smoot-Hawley Act was of little consequence. It did not spark a trade war. The main reason for collapse in trade after 1929 was a downward spiral in demand, caused by government adherence in capitalist countries to the doctrine of a balanced budget.
The worldwide deflation of the early 1930s was the result of a monetary contraction transmitted through the international gold standard. ~ American economist Ben Bernanke & English economic historian Harold James
Clinging to the gold standard meant that governments were afraid to increase the money supply, for fear of compromising the value of their currencies. Credit became scarce: restricting investment, and thereby reducing demand.
Let me remind you that credit is the lifeblood of business, the lifeblood of prices and jobs. ~ President Hoover
Disasters among central European banks, partly a legacy of the Great War, had ramifications across the Atlantic. An antiquated and unstable banking system in the United States readily led to bank failures, with a domino effect.
From 1930 to 1933, a series of bank runs and failures closed 1/3rd of US banks. The volume of money in circulation plummeted: the normal flow became a trickle.
The banking crisis quickly spread to Europe. Both domestic and international chains of credit were broken.
Credit dried up. International capital loans fell more than 90%.
The fall scared consumers, causing a rapid decline in production. Businesses had difficulty servicing their debts, and there were no new loans to be had. Thousands of industrial companies were pushed into bankruptcy.
Meanwhile, the Federal Reserve did nothing to prevent the collapse. Treasury Secretary Andrew Mellon believed that weeding out “weak” banks was a harsh but necessary prerequisite to bank system recovery; thus the Fed saw no need to staunch the massive loss of monetary lifeblood.
All this calls for a re-appraisal of values. ~ Franklin Roosevelt in 1932, before becoming President
Between 1929 and 1932, US output fell 30%, while employment plummeted 8-fold. The oft-cited figure of 25% peak unemployment is a gross understatement. (US government employment figures have always been fiddled to present a rosy picture, lest the citizenry revolt against the rigged system.) Well over half of American workers were idle.
It was not until 1937 that US output was back where it had been in 1929. Persistent long-term unemployment destroyed the lives of tens of millions.
Often no one in authority had any positive idea of what to do, and responded to disaster in the policy clichés of balancing budgets, restoring the gold standard, and reducing tariffs. ~ Charles Kindleberger
Efforts by the government to spark the US economy were often inept, as Roosevelt’s political rhetoric and policies deterred investment confidence in businessmen. Only with the entry of the US into the 2nd World War did the economy revive.
Much of Europe suffered similarly. Unemployment in Germany shot up at a breathtaking rate. The severe economic distress strained the German political system to the breaking point. In 1933, a resolute leader who promised a fresh start – Adolf Hitler – took power.