Why Great Depression - Causes and Personal Recollections
By Lindsey Williams
Those of us long in tooth have difficulty understanding why folks these days worry so much about an economic recession. The Great Depression of 1930-34 that we lived through was a genuine wide-wasting foot-stomping calamity.
The historic designation of great as in large -- is totally inadequate. It was a defining event that totally rearranged our concepts of government, social responsibility and employer-employee relations.
United States population at that time was 123 million, a little less than half that of today. Fortune Magazine estimated that 34 million men, women and children (28 percent) were without any income what so ever. In the absence of unemployment compensation programs, the federal government had no way of determining actual figures.
Average weekly pay for those who had jobs was $16.21. Purchasing power of money was three times that of today, but pay was less than todays government-mandated minimum wage.
Five thousand banks failed during the Great Depression. More than 237,000 families were evicted from their homes. Two million men were bumming around the country at any given time searching for work.
Many cities patrolled the roads to prevent transients from seeking work where long-term residents were jobless. Those that sneaked by were arrested a practice that was ineffective because men broke windows or accosted strangers in order to get a meal and bed in jail.
Every city had a soup kitchen where long lines of hungry people mostly men waited. Women with children went to the head of the lines.
Shantytowns of scrap lumber and tents -- without water or sewers -- sprang up in wasteland near cities. They were called Hoovervilles after President Herbert Hoover who took office in 1929 as the world economy collapsed.
Laid off workers formed labor unions to bargain job security. My first assignment as a high school newspaper reporter was to cover the bitter 1936 sit-down strike at General Motors factories in Flint, Michigan.
Personal Recollections
I was a nine-year-old boy at Flint, when the Depression was heralded by the stock market crash of 1929.
Men abandoned their families to the charity of working relatives, 60 cents a day in city welfare and once-a-month handouts of surplus farm products. Farmers were in equally dire straits because foreign markets had collapsed. A devastating three-year drought compounded their miseries.
It is with great pain that I recall those days. My father abandoned my mother, me and two younger sisters. Once in awhile we got a $5 bill in a letter from him without message or return address.
Fortunately there were three uncles nearby with jobs who helped us out. Mother waited tables for a dollar a day plus tips 50 cents on a good night.
I peddled handbills and caddied at a golf course on weekends. My right shoulder today is an inch lower than my left as a result of toting a golf bag before my growth stopped.
We lost our home, moved to cheap rent places, then attic apartments. Mother gave up her possessions for back rent. She would not go on welfare. That was a disgrace.
Finally when we were really starving she went to the surplus depot and brought home a peck-sack of dried peas. For ten days we had nothing but pea soup for breakfast, dinner and supper. I still hate pea soup.
Finally the landlord ordered us to leave he needed money also -- and kept Mothers cherished piano for back rent. She never played again.
We moved our beds into the basement of an uncles home, and his family set us at their own meager table.
My mother, maternal grandmother and three aunts pooled resources. Our rented house was crowded but home.
Our meals were sparse, yet we all laughed when we read in a discarded newspaper the menu for prisoners at the county jail. They had the same meal that day not much as we were eating.
A morning ritual was everyone assembling to make cardboard inserts for shoes whose soles had worn through. By the end of day the inserts would be worn through also.
The point of this depressing tale is that it was not unusual back then. Todays generation cannot comprehend the demoralizing impact that a deep, economic depression has on a nation -- thank God.
Stock And Tariffs
It is popularly believed that the Great Depression was caused by the spectacular stock market crash of 1929. In fact, root causes of the economic collapse were complex.
Stock markets have little effect on the overall economy. Buyers of common stock, for the most part, buy and sell to each other. After an initial sale of stock, issuing companies receive no benefit from resales by others. At that time, less than one percent of adult Americans held common stocks.
Traders in stocks continuously monitor economic developments to try and ascertain future trends. Buy low, sell high. Collectively they are remarkably good forecasters.
Nevertheless, the financial panic here and abroad at the time is instructive. A cogent analysis is that by Jude Wanniski in The Way the World Works. He formerly was associate editor of the Wall Street Journal and now heads his economic consulting firm, Polyconics.
American workers and farmers geared up to supply the Allies in the First World War. The U.S. government loaned money to France and England. The latter bought armaments and food in great quantity because their farm systems were disrupted.
International purchases in those days were made in gold. By 1929, the U.S. had gathered 80 percent of the world supply. Foreign buyers of American goods had only a small supply of gold available for overseas purchases. This scarce commodity went up in price for foreign customers as it became even scarcer.
After the war, European farmers and workers resumed full production. They began underselling American products. The Congress, with full approval of presidents, imposed tariff taxes on imported wheat and corn to protect American farmers.
Tariff taxes seemed to work so well, Congress imposed them on 200 additional commodities. Industrial and farm profits started to rise. Gold coins were a common currency.
Foreign countries imposed tariffs of their own in retaliation. But Americans didnt seem to notice. The spiral toward a worldwide economic depression had begun.
Stock Market Crash
With U.S. profits rising, irrationally exuberant investors rushed to buy common stocks. There was very little bank regulation. Loans to buy stocks that were soaring were easily available with just 10 percent cash and the other on 90 percent margin. Banks joined the mania by investing their depositors money in high-flying sure-thing stocks.
As stocks doubled in market value, they were re-invested on margin in a race to become millionaires. The phenomenon was occurring in real estate. The Florida Land Boom roared ahead in the same manner. That decade is remembered as the Roaring Twenties.
Amateur market traders didnt notice that professional bear investors were beginning to sell short -- that is, contracting to sell stock for a lower price at some future date.
Only the bears sensed the ultimate, depressing effect of tariffs higher cost of imported raw materials and less profit on sales abroad.
Hoover and a new Congress took office in March 1929. The stock market hit its then-record high of 800 on Aug. 5 (8,000 today, 11,000 not so long ago). However, quarterly reports of key industries began to show profit declines.
Congress, ignorant of impending market correction, threw gasoline on the fire by scheduling debate on a new tariff bill sponsored by Sen. Smoot and Rep. Hawley. The commodity targeted was carbide, a critical ingredient in the manufacture of industrial products.
It was apparent that the new tariff bill would pass. Republicans and Democrats were of the same mind. Hoover ran on support for tariffs to protect American farmers and workers. Democrats made high tariffs a plank in their campaign platform.
Bears raced for the exits. The stock market experienced its heaviest sell-off in its history on Thursday, Oct. 24. The New York Times bannered the story: Worst Stock Market Crash Stemmed By Banks; 12,894.650-share Day; Leaders Confer; Find Conditions Sound.
Brokers called clients to cover the margin loss to protect their investments. Many stockholders scraped up enough cash to cover losses.
The market rallied a bit on Friday. Federal Reserve bank trustees met all weekend and decided they needed to do nothing. The market gained a little more on Monday, but not enough to be reassuring.
When the market opened Tuesday, Oct. 29, all overnight orders were to sell at market. The telegraphic tape of sales quickly fell two hours behind. Telephone calls to brokers were unanswered.
A crowd of stockowners gathered on Wall Street and steps of the old U.S. Treasury building outside the Stock Exchange -- waiting for scraps of information hustled out by infrequent messengers.
The Times headline blared: Stocks Collapse In 16,410,030-day. The date has gone down in history as Black Tuesday.
In four days of trading, the Dow-Jones Industrial stocks had fallen to just 8 percent of their pre-crash values. The countrys Gross National Product value fell from $104 billion, to $41 billion.
Aftermath
One of the myths about the Black Tuesday crash was that many bankrupt investors committed suicide that day. A London newspaper reported erroneously that 11 busted-brokers jumped from their office windows in despair.
The rumor started as the result of the suicide -- witnessed by Winston S. Churchill on a visit to New York City -- two weeks before the crash. A vice-president of the Earl Radio Corp. jumped to his death from the Savoy-Plaza Hotel. His suicide note read: We are broke. Last April, I was worth $100,000. Today, I am $24,000 in the red.
A week after the crash, J.J. Riordan, president of the County Trust Company, took a pistol from a tellers cage at his bank, went to his home in downtown Manhattan, and shot himself. The news was suppressed until after the bank closed at noon Saturday to avoid causing a run on the bank.
There is no record of jumpers during the pair of crashes, and none ever in the New York financial district. Nonetheless, Will Rogers, a popular humorist, quipped, When Wall Street took that tail spin, you had to stand in line to get a window to jump out of.
Ironically, Congress adjourned in November 1929 without action on the suspect Smoot-Hawley Tariff Act and did not return until the spring of 1930. By this time the Great Depression was well underway.
Still unaware of the damaging effect of tariffs, Congress completed action on Smoot-Hawley and passed it in the Senate on June 13 by just two votes.
Inasmuch as it passed after the Depression was well underway, it was not realized that the debate and certain passage spooked the forward-looking stock market.
Passage of the act continued to hamper recovery. A hundred thousand companies closed.
It took years for a new science of economics to realize that tariffs, the uneven distribution of gold and Federal Reserve inaction had done the damage not the stock market.
President Franklin D. Roosevelt took office in 1933. He closed all banks for ten days to stem panic withdrawals, outlawed gold coinage, set farm quotas and established government make-work programs (who can forget the WPA and the CCC?) to pump confidence and money into the U.S. economy.
Yet, it was not until Smoot-Hawley was scrapped -- and America armed for World War II -- that the U.S. economy regained vitality and that unemployment returned to normal.
Post Script
Another personal note: During WW2, I joined the Navy and my sisters married military men. Our mother got a job at Buick making war products and bought herself a house.
Lindsey Williams is a Sun columnist who can be contacted at:
LinWms@earthlink.net
LinWms@lindseywilliams.org
Website: http://www.lindseywilliams.org with several hundred of Lin's Editorial & At Large articles written over 40 years.
Also featured in its entirety is Lin's groundbreaking book Boldly Onward, that critically analyzes and develops theories about the original Spanish explorers of America. (fully indexed/searchable)
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