We the People: The stock market crash was not the only cause of the Great Depression

Each week, The Spokesman-Review examines a question from the naturalization test that immigrants must pass to become US citizens.

Question of the day: When did the Great Depression start?

Although the stock market crash of 1929 is widely blamed for triggering the Great Depression – and would be considered the correct answer to the naturalization test – the worst economic downturn of the 20th century actually started earlier and had more causes than the crash.

“There was no start date,” said Matthew Sutton, Berry family professor emeritus in the liberal arts and history department at Washington State University.

The crash revealed other problems in the national and international economy that had developed during the 1920s, said Sutton, who teaches the Great Depression as part of 20th-century history. But with the market set to lose almost 90% of its value over the next three years – hitting its lowest point 90 years ago last Friday – linking the depression to the crash is a bit of a myth.

For American farmers, the depression began long before 1929. The prices of agricultural products had risen dramatically during World War I, due to high demand and insufficient supply of European products during four years of war. .

Profits from the war years encouraged farmers to invest in more land and new machinery to work it. They took on more debt, but when prices fell due to greatly increased supply and weaker demand, they struggled to repay those loans and many farms were foreclosed.

The 1920s was also a time of economic growth with more homes being built and more consumer goods being manufactured, such as automobiles, refrigerators, and telephones. This meant more jobs and more paychecks, as well as greater demand for the things produced. But paychecks only stretched so far, and big-ticket items were often purchased on installment plans with monthly payments rather than purchased outright.

The post-war boom of the early to mid-decade was beginning to slacken at the end of the so-called Roaring Twenties, and when demand for products began to decline, inventories rose and factories cut production , which led to the dismissal of some workers.

More people started investing in the stock market in the 1920s, and the laws of the time made it easier to speculate in stocks. A person could open an account with a brokerage and buy a stock on margin, depositing as little as 10% of the cost of the stock while borrowing the rest from the brokerage or a bank. If the price rose – and some new investors were convinced that prices would always rise – an investor could sell the stock, repay the loan to the brokerage, and keep the profit made on the money invested as the initial investment. If the price drops, they might be required to cover the full amount.

This type of speculation, in which the value of a stock is tied to demand rather than a company’s overall performance, only works as long as new investors continue to enter the market and drive demand. . In 1929, investor growth leveled off at around 10% of American families. Experienced investors who sensed the end of the boom started pulling their money out of the stock market.

On September 3, 1929, the Dow Jones Industrial Average hit an all-time high of 381.17 and began to slide, fluctuating for about a month.

On October 24, known as Black Thursday, it fell 11%. On October 28, Black Monday, it fell 13%. On October 29, Black Tuesday, it fell another 12%.

By mid-November, the market had lost almost half of its value. Despite occasional rallies, the decline would continue for nearly three years until it bottomed out at 41.32 on July 8, 1932.

After losing about 89% of its value, the market will not return to its level of September 3, 1929 for about 25 years.

The crash wiped out many investors – stories of people jumping out of windows in despair are mostly urban legends – but by itself it didn’t cause the Depression because most of the country had no shares.

Instead, it sparked what Sutton called “the Great Depression for middle-class white Americans.”

Black Americans had faced poverty from the beginning of the country, said Sutton, who cited part of Studs Terkel’s book on the Great Depression, “Hard Times.”

“The Negro is born in depression. It didn’t mean much to him,” Clifford Burke, a Black Chicago retiree, told Terkel. “It only became official when it hit the white man.”

President Herbert Hoover, who campaigned in 1928 on “tough individualism” and a bright future of hope, took office in 1929 after a landslide victory. He was wary of government intervention and, like many pundits, initially expected the market to correct itself. He asked companies to voluntarily keep their workers employed and Americans to tighten their belts and work harder.

But more and more people were not working. The country’s unemployment rate rose from 3.2% at the end of 1929 to 8.7% at the end of 1930. It continued to rise and peaked at 24.9% at the end of 1933 , according to the US Bureau of Labor Statistics.

Republican Hoover would go from a crushing winner over Democrat Al Smith to a crushing loser over Democrat Franklin Delano Roosevelt in four years. While he has long been criticized for his handling of depression, Sutton said he has been seen in a somewhat better light in recent years.

He was more progressive and interventionist than most of his party, Sutton said, but not as much as Roosevelt would be. He faced a conservative Republican Congress for the first two years of his term and a divided Congress for the second.

“It didn’t have the real-time economic data that we have,” Sutton said.

The crash showed not only the abuses of an unregulated market and margin trading, but also the flaws in the country’s poorly regulated banking system, which had loaned out much of the money for these transactions. In some cases, the banks had invested their depositors’ money in stocks that were now nearly worthless. Cash or reserves at many banks were dangerously low. When too many depositors tried to withdraw money, a bank emptied or “failed,” causing most customers to lose their money.

Bank failures doubled from about 650 in 1929 to more than 1,300 in 1930, and reached 4,000 in 1932, according to US historical statistics.

Other factors aggravated the depression. In 1930, Congress passed the Smoot-Hawley Act, which imposed a tariff on some 900 imported items. It was designed to help protect American-made products from foreign competition, but sparked a trade war. That summer, a drought began that would hit the Midwestern and Mid-Atlantic states, causing massive crop failures for much of the decade, a phenomenon known as the “Dust Bowl”.

The economic upheaval has not been limited to the United States, Sutton said. Banks in other countries were also poorly regulated and experienced market failures. Nations that lost World War I had to pay off massive debts and became poor markets for goods.

“It was a global depression,” Sutton said. “International finance was a mess.”

The upheaval led to major changes of government in some countries, such as Fascism in Italy and Nazism in Germany.

In the United States, the Roosevelt administration instituted a series of government programs to put people to work or provide them with food. Some worked, some didn’t. The U.S. Supreme Court ruled some unconstitutional, and Roosevelt proposed new ones. Unemployment slowly began to fall in 1937, but between May and June 1938 experienced what is known as the “Roosevelt recession”, when production fell again and the unemployment rate soared to 20%.

“FDR took his hands off the wheel too soon,” Sutton said.

Unemployment in the United States would not drop below double digits until the end of 1941. By then the nation had entered World War II, drafted millions into the armed forces, and increased production defense until the unemployment rate fell below 2. % at the end of 1943. The Great Depression was over.

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