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Black Tuesday

The official kickoff for the Great Depression came on October 29, 1929, the day the stock market took a bigger dive than a sumo wrestler in a pool full of Jello.  A week before the crash stock prices had been plummeting, sending Wall Street inventors into a cold sweat. No one was sure what was happening across the United States but those who still owned stock took no chances; selling their shares before prices sank even further. Grown men mobbed the streets outside of the New York Stock Exchange, many weeping hysterically. And then came the rumors of businessmen jumping to their deaths to escape from utter financial ruin. Some news reporters got creative with their stories of businessmen lining up at windows to commit suicide. One reporter wrote that Broadway was littered with corpses of jumpers. It didn’t matter that these suicide stories were fake, okay not entirely… two actually jumped... but the mental image of men plummeting ten stories to become sidewalk paste was too juicy of a story to pass up. This is how the worst financial disaster this country has ever seen had begun.

 

The stock market crash of ‘29 is often mistaken for being the cause of the Great Depression. But economic collapses don’t happen overnight. LIke a volcano, the pressure builds slowly until one day you wake up to lava pouring into your village. Throughout the Roaring Twenties the country had been on a wild ride of urbanization and mass consumerism. Similar to what the internet would do in the 1990s, America was experiencing a technology revolution as new consumer inventions promised to change the way people lived. Refrigerators, washing machines, telephones, radios, vacuum cleaners, and automobiles were just a few of the hot new products to hit the shelves. To meet the voracious demand factories increased production and hired more workers. By 1928 unemployment had dropped to 3%.The future had never seemed brighter.

 

But keep in mind that only the rich and middle class could actually afford to buy these new products. The rest were lured to the checkout aisle by easy credit, where, with a little money down, you could own a gadget that you probably couldn’t afford. America was changing rapidly but not fast enough in the area where it mattered most. For decades workers had been fighting an uphill battle with their bosses to reduce hours, improve conditions, and raise wages. Workers went on strike to try and force change. But more often than not they were met with police or company thugs who literally beat them back to work. To politicians, labor unions were synonymous with socialism. And so, urban factory workers continued to work for wages so low that they couldn’t never hope to afford to buy the flashy consumer goods that they were making. But the factories kept churning them out anyway. Sooner or later companies were going to face the grim reality that they would run out of customers to sell to. The pin on this economic grenade had already been pulled and nobody even realized it.

 

With American businesses making money hand-over-fist stock prices continued climbing ever upward. Traditionally, playing the stock market is seen as a rich man’s game because only they are the ones who can afford to lose “a little money” when the stock goes bad. But with the stock market soaring average Americans wanted to get in on the game in the hopes of getting rich quick, Banks recklessly came up with a system called buying on the margin lending people money to play the stock market to people who probably shouldn’t have been playing in the first place. Essentially, what buying on the margin meant is that if you sold your stock for higher than what you paid for it you were able to repay your loan and make a nice profit. But if the stock went bust, you (and the bank) lost. But confidence in the system was so high that people kept on believing that stock prices would continue to rise forever. With factories over-producing consumer goods and wages kept low it was only a matter of time before the whole system came crashing down. That time came on October 29, 1929.

 

Like we said before, the momentum for the crash had been building for years and only a few people could foresee the impending disaster. One of those men was economist Roger Babson who warned business leaders that the economy was headed for a crash. But rather than thanking him for his insight they shouted him down calling him a pessimist. Some even came out swinging by questioning Babson’s patriotism as an American. Even in October as the economy came crashing down, just as Babson said it would, there those who angrily accused Babson of causing the crash by creating a financial panic. But the truth is that those who should have known better simply stuck their heads in the sand and chose to pretend that optimism and rainbows would prop up an unstable economy indefinitely.

 

Hoover Fumbles

Herbert Hoover became president just months before the Great Depression officially began. The country had been through dozens of downturns before but one of the reasons the depression became so severe may have been because he didn’t take the crisis seriously enough. He called it a “passing incident” and promised that it would be over in a matter of a couple months. In his inauguration speech given just a few months before the crash he went so far as to say that America was on the verge of completely eliminating poverty. History has a dark sense of humor that’s for sure.

 

Hoover, like most conservative thinkers of the day, believed in the rugged individualism of the American people, holding bulldog firm to the belief that it was unnecessary and dangerous for the federal government to step in and offer help to those who had fallen into poverty. History has come to judge Hoover as the guy who sat back and did nothing while the nation collapsed but in reality he actually tried to head off the crisis. The only problem was that his solutions didn’t work. Like many Americans at the time, Hoover didn’t believe in the concept of “Big Government” coming to the rescue. Rather than having the federal government intervene directly, Hoover prefered to act as a negotiator bringing business and labor union leaders together to work out a solution on their own. He asked businesses to halt layoffs and wage cuts. But most business leaders chose to ignore cooperation and instead continued to layoff workers, cut wages, and slash prices in a vain attempt to unload the merchandise piling up in their warehouses. In a vain attempt to save themselves they doomed the whole country. As unemployment tripled to 9% by 1931 workers stopped buying new homes and cars, they stopped planning vacations, they stopped by new gadgets, and many stopped repaying their loans to the banks. With consumers unable to consume this led to more layoffs and wage cuts which caused more consumer panic. With so many people defaulting on their loans, banks-- most of them small local things-- began to fail. The economy in 1930 found itself in nosedive with the ground coming up fast.

 

With the pressure mounting Hoover and the Republican congress gave in and agreed that maybe some government intervention was necessary. In 1930, Congress passed the Smoot-Hawley tariff with the intention of protecting American businesses from foreign competition. What a tariff does is to jack up the price of imported goods by heavily taxing them, making imports more expensive than American-made goods. But tariffs are the equivalent of throwing eggs at your neighbor’s house, they’re going to egg you back. And so, foreign countries responded with their own tariffs against American goods. Henry Ford had spent the night with the president (wait, that doesn’t sound right) calling the whole tariff idea “sheer stupidity”. Right on cue, the American economy slumped even further. As a last resort Hoover pushed for what today we would call a government bail out with the creation of the Reconstruction Finance Corporation (RFC) to lend money to failing businesses in the hopes that they would start hiring again. In 1932, the RFC gave out more than $2 billion (the equivalent of $33 billion in today’s money) but there were a few glitches to this plan. For starters, 80% of the money went to banks and big business who used most of it to get themselves out of debt rather than boosting workers spending power with increased wages and hiring. Unemployment grew to nearly 22% (50% in factory towns like Detroit and Chicago) and if you were African-American, Mexican-American, or Native American the situation was even worse. The United States was disintegrating fast. Hoover tried one last Hail Mary pass to save the situation by pushing congress to create the Public Works Administration (PWA) that would pour $100 million into massive building projects, the biggest being the Hoover Dam in Nevada.

 

Hoover had no choice but to change his position on keeping the government out of the economy but he still was a conservative who held firm to the belief that government assistance to poor people would lead to laziness and make the situation worse in the long run. In those days welfare and social security didn’t exist. Americans were fiercely proud of the idea of “pulling yourself up by your bootstraps”. Poverty was seen as a failure of the individual not of the capitalist system. At the start of the Great Depression Hoover encouraged local governments, churches, and charities to handle the problem of providing for those who were hungry and homeless. This built community character, he reasoned. But cold hard logic is more powerful than warm fuzzy ideals. As Americans tightened their wallets donation money stopped rolling in. The combination of reduced funds and a growing number of caseloads charities just couldn’t handle the strain. Local governments weren’t much better at providing help because unemployed and homeless people can’t pay taxes which pushed their limited budgets to the breaking point.

 

Hoover became a joke among the American people. In fact, they openly became hostile at what they mistook for his total lack of empathy. Americans mocked him by using his name as a byword for poverty. A “Hoover Flag” referred to a person’s empty pocket that had been turned inside out. A Hoover blanket were old newspapers that the homeless used to cover themselves while they slept. And as millions more became homeless the shanty towns they created became infamously known as “Hoovervilles”, springing up in every major city across the country. Scraps of cardboard, tin, and plywood were thrown together to construct makeshift houses. Some of the largest Hoovervilles, like the one in St. Louis, built shack churches, stores, schools, and even elected their own “mayors”. Out of work and desperate for food people did anything they could to feed themselves. Once proud factory workers and businessmen sold apples and pencils on the street. Many flocked to the local city dump to scrounge for anything that was still remotely edible. The American dream was dead and any hope at recovery was fading fast.  Hoover’s gross mishandling of the situation led to a landslide victory for his opponent – Franklin D. Roosevelt – in the election of 1932. For the first time since 1898 Democrats had control of Congress and the White House.