The Great Depression, I Chapter 23 in text. The Great Depression, I The Great Depression was a...

The Great Depression, I

Chapter 23 in text


The Great Depression was a world-wide economic crisis. It had its roots in the 1919 Versailles peace settlement that officially ended World War I.


The USA had lent its European Allies about $7 billion during the war, in addition to nearly $3.5 billion before the US entered the war.

During the 1920s, the US State and Treasury Departments insisted on full repayment of these debts.


France and Great Britain had counted on the $33 billion they were supposed to have received in reparations from Germany to repay these debts to the United States.

But by 1923 Germany was completely bankrupt.


Germany during the earliest years of the 20th century had counted on 2 main industries to support its economy:

the rich coal industry of the German Ruhr Valley in the province of Alsace-Lorraine, and the lucrative weapons factories that had been located in the northern parts of Germany.


But Alsace-Lorraine had been deeded to France as part of its share of the “spoils of war.”

Germany’s remaining coal mines near the Ruhr area barely produced enough coal for Germans’ needs, let alone any extra for sale.


As a condition of the Versailles Treaty, all German armaments factories were ordered closed.

Thus, Germany had been stripped of the very two things that might have helped it pay off the heavy debt ordered by the treaty.


American banker Charles G. Dawes proposed an American-led solution to the German crisis. It became known as the “Dawes Plan.”

American banks would pledge to loan nearly $2.5 billion to Germany, in increments, between 1925 and 1930.


According to the Dawes “circular debt” structure, Germany would use the loan to pay its reparations payments to the Allies, which could then repay their war loans to the United States.


It was assumed that this plan was fully in accordance with other world-wide gestures that would ultimately make nations realize how much they depended on each other. The thinking was that this inter-dependence would help prevent future war.


In much the same line of thinking, the French foreign minister Aristide Briand signed a pact with President Coolidge’s Secretary of State Frank Kellogg in 1927 and eventually urged most of the nations of the world to join. This Kellogg-Briand Pact made wars of aggression illegal.


Herbert Hoover, an Iowan who had risen from poverty to become a mining millionaire, was elected president in 1928 after having served presidents Harding and Coolidge as Secretary of the Treasury. He had also worked for President Woodrow Wilson’s food production office during World War I.


Hoover was not a professional politician, but had strong views on the cooperative possibilities of business and government working together to abolish poverty. A good part of the cooperation he sought involved government standing aside when business needed freedom from restriction.


The business boom during the Coolidge presidency (and during the early part of the Hoover presidency) seemed to prove this strategy worked. Stock markets had historically known boom-bust cycles, but from 1925 until the big crash in 1929, the market rose with no break.


It seemed to many investors that there was simply no way to lose money in stock purchases. By 1928 ordinary Americans were actually borrowing money to invest in stocks (this is called “margin buying” and is not legal today. In 1928, it was almost seen as an American’s duty to borrow money and invest it, to become richer.)


Market analysts gauge the health of the stock market by computing the ratio of a stock’s earnings over a period of time to the original cost per share. A smart investor is skeptical of a ratio over 10:1 – this indicates the stock has risen to its highest safe price, and is likely to fall soon.


In the spring of 1929, the average P/E ratio on the Dow Jones list of average stocks was 16:1.

Experienced investors began quietly to sell stocks, as newcomers to the market began to invest large amounts of borrowed money to take advantage of this high ratio of profit to price.


Recall that the United States was alone in enjoying this dizzying prosperity in the late 20s – European countries were suffering the effects of the circular debt structure, which virtually chained them to Germany’s economic fortune. When Dawes payments ceased in 1927, Germany’s downward slide dragged the Allies along.


Republican political leadership in the United States, meanwhile, was enacting higher protective tariffs to keep domestic markets safe for American-made goods. This economic isolationism mirrored the political isolation that many Americans felt would keep them forevermore out of “Europe’s troubles.”


But they overlooked the fact that shutting European products out of American markets destroyed any last hope European countries might have of making profits that could have let them justly pay off their debts to the United States.


Given all of these poor conditions propped against each other, it is probably inevitable that the crash would hit the United States eventually. This crash did not cause the Depression; it was merely the first very obvious symptom of all the underlying problems that had been festering for nearly ten years.


All through October 1929, as the “smart money” was quietly selling off shares of stock, market prices steadily declined. On October 24 the volume of shares sold reached 13 million and stock prices nosedived. Banks began calling in payment for loans they had issued to cover stock purchases.


Borrowers scrambled to try to sell the shares they had bought with borrowed money, so that they could repay their bank. The massive sales drove stock prices down further.

On October 29, “Black Tuesday,” the market lost 1/3 its overall value. The market would not rise even a point for the next 4 years.


The country had been through times of boom and bust before; President Hoover assured the country that there had been no “crash,” just a market adjustment of prices that would soon be over.


Hoover famously encouraged Americans that “Prosperity is just around the corner.” He believed that one of his important roles was that of cheerleader, but as more Americans lost their jobs because of the lack of markets for factory goods, it seemed to be hollow advice from a millionaire who had nothing personally to worry about.


The average household saw its annual income drop by more than half, as did the annual sales of American businesses.

The banking industry experienced failures in over 1/5 of American banks. And when a bank failed, all of the money deposited there was forever lost to the depositors.


As wage-earners lost their jobs, they were unable to keep up the time payments they had been making on their homes, cars, and furniture.

Homelessness was common; most industrial cities had shantytowns nicknamed “Hoovervilles,” in which the homeless lived in cardboard boxes.


Congress’ immediate response was to pass yet another protective tariff as a last-ditch effort to shore up profits at American factories. This Hawley-Smoot Tariff in 1930 did nothing to east the depression and may have in fact caused it to grow deeper.


Hoover urged (but would not require) business to voluntarily reduce their profits and keep their employees on the payroll.

He also urged Americans to contribute to private charities as much as they could, so that the charities could care for the growing numbers of poor.


This approach of “voluntarism” was well-intentioned but was not nearly enough to cope with the needs of the country.


Congress appropriated $750 million in public works projects (dams, bridges, street repair, etc.) to stimulate employment.

Congress chartered the Reconstruction Finance Corporation in 1932, under-writing $1.5 billion in loans to banks and businesses to allow them to stay open.


Neither program was successful. Hoover was at heart a laissez-faire businessman who felt government money had no legitimate place in business.

The RFC, particularly, was criticized as “welfare for the rich,” since the loans would go to businesses and not to workers themselves.


And at any rate, Hoover was reluctant to release any of the appropriated money. He was criticized as being an enemy of the working man, but staunchly maintained that he was safeguarding the free enterprise system and protecting the country from socialism and communism.


One thing for which Hoover was hard put to excuse his own actions was the stand he took with the Bonus Expeditionary Force, a group of about 14,000 WWI veterans who marched on Washington in 1932 to demand Congress issue their veterans’ pensions early, and help them meet their living expenses.


Hoover publicly and privately urged the Senate not to honor their demands, and wait until 1945 to begin the pensions as the original legislation had stipulated.

Sensing failure, about half the bonus marchers went home. The rest established a Hooverville in the Anacostia section of Washington DC.


Hoover refused to visit with the men (some of whom had their families with them), or to send a representative from his staff to do so. His refusal was seen by the country as an insult to the sacrifice these men had made for their country 15 years earlier.


It was a public relations nightmare for the president, who handled the affair in the worst possible way. He ordered the Army’s Chief of Staff, General Douglas MacArthur, to use force to clear out the settlement. MacArthur moved in with tanks and bayonet-wielding soldiers. They burned the camp to the ground.


Newspaper cameras captured many photos of the “burning of Anacostia Flats.” Hoover’s popularity, already suffering because of the Depression, plummeted.

Still, the Republican Party nominated him for re-election in 1932. Not to have done so would have created the appearance that the Party acknowledged Hoover was a failure.


Democrats nominated Governor Franklin D. Roosevelt of New York. The gregarious FDR promised a “new deal” for every American if elected, though he was short on the specifics about just what this new deal would be. He promised to repeal Prohibition and get government aid to every man who was out of work.


Roosevelt was also a millionaire, but spoke movingly of the “forgotten man” in his campaign speeches. He never seemed to tire of meeting people, and was known for his wide and effusive grin. Hoover, by contrast, was quiet and shy; by 1932, people saw him as hard, cold, and totally without human emotion.


FDR defeated Hoover in a predicted landslide (Hoover expressed relief not to have won.) Hoover begged FDR not to take any drastic measures to solve the country’s problems, nothing to upset the business climate the country was accustomed to. FDR would make no such promises.

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