VIDEOTAPE LECTURE #18 OUTLINE
[00:00] Bars, Tone, and Countdown
[03:30] Silent Film Star
[04:22] Herbert Hoover
[07:10] John Jacob Raskob
[07:45] "Everybody Ought to be Rich" (1929)
[09:30] Irving Fisher, Yale economist
[10:40] Bull market

1. [12:20] Rising stock dividends
2. [14:40] Increase in personal savings
3. [15:50] Relatively easy money supply
4. [17:25] Over production profits funneled into new production
5. [19:30] Lack of regulation on stock market
   • [20:50] "buying on margin"
6. [23:40] Psychology of consumption

1. Bankers
2. Brokers
3. Businessmen

Some questions to keep in mind:

1. Why were Americans so confident in the stock market in the years leading up to the Great Depression?
2. How did the Psychology of Consumption shape the causes and effects of the Crash?
3. How did stock market investing change during the 1920s? Who were the main investors and how did they pay for their investments?
4. Explain the statement: "By 1929, much of the money that was invested in the stock market did not actually exist."
5. Why did Hoover choose the term "depression" for this economic downturn? Why do you think this term has remained part of the American vocabulary ever since?

Optimism and Prosperity

When Herbert Hoover was elected President in 1928, the mood of the general public was one of optimism and confidence in the U.S. economy. Few saw any reason why prosperity should not continue. In his acceptance speech for the Republican party nomination for the presidency, Hoover had said:

"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."

Hoover's optimism and boosterism was shared by many in the beginning of 1929. An editorial in the New Year's edition of the "New York Times" on January 1, 1929 stated:

"It has been twelve months of unprecedented advance, of wonderful prosperity. If there is any way of judging the future by the past, this new year will be one of felicitation and hopefulness."

That same year John Jacob Raskob, Chief Executive of General Motors and head of the Democratic National Committee published an article entitled "Everybody Ought to be Rich" in the Ladies Home Journal. He suggested that every American could become wealthy by investing $15 a week in common stocks. Raskob failed to realize that the weekly salary of the average worker was only about $17-$22, but that's not important: the optimism was there.

A "Bull Market"

For five years prior to 1929, the stock market had been characterized by rising prices; there was an enormous "bull market." (The opposite, a market characterized by falling prices, is called a "bear market.") We have six speculations to explain why so many people invested in the stock market during this time.

1. Rising stock dividends.
The stock market was propped up by new investors entering the market, who viewed it as an easy way to get rich quick. However, economic historians estimate that a relatively small number of Americans--about 4 million--had investments in the market at any one time. Rather, the constant influx of new investors coming in and old investors moving out ensured that new money was always floating around.

2. Increase in personal savings.
Higher wages meant that even average Americans now had surplus money to put into savings or invest in the stock market.

3. Relatively easy money policy.
At this time, banks made money more readily available at lower interest rates to more and more people. Although economists debate the actual influence of this phenomenon on the stock market, it's conceivable that many people took out loans not only to buy cars, but also to buy stock.

4. Over-production profits were invested in new production.
From 1925 on, industry was over-producing. In anticipation of eventually selling the surplus, business leaders funnelled their profits right back into industry, investing in factories, new machinery, and more workers, which led to even greater overproduction. This increased production gave the companies an aura of financial soundness, which encouraged Americans to buy more stock.

5. Lack of stock market regulation.
At this time there were no effective legal guidelines on the buying and selling of stock. Free from legal guidelines, corporations began printing up more and more common stock. Many investors in the stock market practiced "buying on margin," that is, buying stock on credit. Confident that a given stock's value would rise, an investor put a down payment on the stock, expecting in a few months to pay the balance of the initial cost plus receive a hefty profit. This turned the stock market into a speculative pyramid game, in which most of the money invested in the market wasn't actually there.

6. Psychology of consumption.
We've already discussed this phenomenon in Lecture 15. The psychology of consumption fed the optimism of investors and gave them an unquestioning faith in prosperity. When the crash did come, it was even more devastating because of this unquestioned faith.

The Crash

The stock market--not housing starts, sales of durable goods, or the financial health of banks-- was viewed as the chief economic indicator of the U.S. In September of 1929, stock prices began to fluctuate, but these were dismissed as temporary. What many did not realize--or refused toadmit-- was that stock prices were totally out of proportion to actual profits. Sales of goods and construction of factories were falling rapidly while stocks continued to climb. Still, very few were worried; they still accepted Adam Smith's "self-adjusting economy" as doctrine and believed the problems would fix themselves.

October 24, 1929 is known as "Black Thursday." On this day, people began dumping their stocks as quickly as they could. Sell orders inundated market exchanges, and the bull market suddenly shifted to a bear market. By that evening, the market had stabilized a bit as J.P. Morgan and other financiers bought up stock to stop the panic and keep the market afloat.

On Friday, October 25, the House of Morgan continued to keep the market stable and it seemed that the panic was over. The weekend intervened, and as often happens to people in their free time, they began to worry. George and Martha and thousands of their friends decided to sell whatever stock they still had as soon as the market opened on Monday.

On Monday, October 28 there was another wave of sell orders. The next day, October 29, 1929, is called "Black Tuesday" and marks the beginning of the Great Crash.

This was the single most devastating financial day in the history of the New York Stock Exchange. Within the first few hours the stock market was open, prices fell so far as to wipe out all the gains that had been made in the previous year. Since the stock market was viewed as the chief indicator of the American economy, public confidence was shattered. Between October 29 and November 13 (when stock prices hit their lowest point) over $30 billion disappeared from the American economy (comparable to the total amount America spent on its involvement in WWI).

Still, optimism persisted and many leaders declared that the worst was over. J.D. Rockefeller said:

"These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."

Popular songs of the day mirrored the transition from optimism to despair. In 1930, people sang "Happy Days Are Here Again" and the national income dropped from $87 billion to $75 billion. In 1931, somewhat more dejectedly, people sang "I've Got Five Dollars" and the national income dropped to $59 billion. The song of 1932 was "Brother, Can You Spare a Dime," when the national income fell to $42 billion, eventually dropping to $40 billion in 1933.

Former President Coolidge had this insightful observation about the economic health of the United States:

"This country is not in good condition."

The Depression

So as not to alarm the public, President Hoover chose his words carefully in discussing the state of the economy in 1929. The economic downturns of recent history had been called the "Panic of 1873" and the "Panic of 1893." Hoover called this latest downturn a "depression" rather than a "panic," and the name stuck.

Of course, America was not alone in the Great Depression; it struck all the industrialized nations of the world, including Germany, Britain, and France. Moreover, Germany still had huge reparation payments to make to the Allies in the aftermath of WWI. These reparation payments devastated the German economy and spiraling inflation began. The Allies themselves had borrowed money from the U.S. during the war, were unable to pay it all back during the 1920s, and were now not only broke, but in debt.

Social Problems

These perplexing economic problems caused a host of social problems, including:

• Personal suffering from losing one's job
  
• Breakdown of families
  
• Soaring high school dropout rates (2-4 million)
  
• Homelessness
  
• Organized protests
  
• Around the country, the homeless built settlements of cardboard and tar-paper shacks, called "Hoovervilles" in sardonic reference to President Hoover.
  
• Farmers armed with guns and pitchforks marched on the local banks to prevent foreclosures.
  
• "The Bonus Expeditionary Force." A group of WWI veterans who had been denied their pensions organized the first march on Washington in protest. In 1932, twenty thousand men set up a tent city, vowing to stay until they got their money. President Hoover panicked and sent in the army (led by future war heroes MacArthur and Eisenhower) to break up this peaceful demonstration.

Images of the Depression

There are many stereotypical images of the depression, images enforced by the mass media. These include:

• Bread lines
  
• Hoboes hopping freight trains
  
• College grads becoming gas station attendants (or enrolling in graduate school in record numbers!)
  
• Skyrocketing rates of suicide and mental illness
  
• Former businessmen selling pencils or apples on the street corner
  
• "Okies"--Oklahoma farmers escaping the dust bowl for migrant farm work in California, most vividly portrayed in John Steinbeck's novel The Grapes of Wrath (1939).
  

These stereotypes, many of which have become romanticized in popular culture, only depict the experience of a small number of the American people. The reality of long-term unemployment, the day-to-day despair, was much less dramatic, and thus more dismal. Two basic economic facts soured the lives of average Americans:

1. Unemployment. In his inaugural address, Franklin D. Roosevelt recognized:

"Now let's be frank. You and I know that immediate relief of the unemployed is the immediate need of the hour."


2. Inability to sell goods and services. With so much of the work force unemployed, nobody had the money to buy things.

Escapism

One-third of Americans were below the poverty line, yet some industries actually managed to make a profit at the beginning of the 1930s as the public looked for a way to escape. If Americans couldn't find work, at least they could go for a drive, have a cigarette, or go to a movie. Correspondingly, sales of oil, gas, cigarettes, and movie tickets all went up. Humorist Will Rogers remarked,

"We're the first nation in the history of the world to go to the poorhouse in an automobile."

Laying the Blame

The American public found the "Three B's" responsible for the Crash and the Depression:

1. Bankers
2. Brokers
3. Businessmen

However, the Crash was not the immediate cause of the Depression. It alone was not responsible for a decade of worldwide economic catastrophe. But what was responsible for the Depression? And what would the long-term results of the Great Depression be? The Depression itself was responsible for a dramatic change in the structure of American politics, for a change in Americans' expectations about government, and a shift in U.S. foreign policy in the decade of the 1930s. These are remarkably important issues, so important, that we'll take them up in Lecture 19: "The Great Depression and the New Deal."

Home || Course || Guide || Bios || Photos || Exams || Calendar || Comments/Sign-in