A New Look at Great Depression

Stock Market Crash/Great Depression 1929 While the stock market crash of 1929 did not cause the Great Depression, it is the most remembered harbinger of America’s worst financial crisis. The depression that followed would be a decade of unemployment and hard times. Unemployment became a way of life for as many as 25 percent of the American workforce. National gross product 30 percent and industrial production dropped by 40 percent. The nation’s steel mills worked a 2-3 day weeks for years. Corporate investment went negative with capital investment being below depreciation. The depression also exhibited a “double dip” returning in 1937 after some improvement. Unemployment from 1929 to 1941 was above 10 percent and underemployment was as high as 50 percent. The homeless estimated in New York city alone was 15,000. The stock market dropped over 50 percent. The depression changed American psyche and economic thinking to this day. The Keynesian economic approach, named after John Maynard Keynes, which emphasized government spending and consumers, became the dominant approach. Tariff policy would be changed after centuries of tariff protection because of fear of trade wars. The Depression would also initiate a decade of social and economic legislation to build a safety net. Banking laws were strengthened to protect consumers, and the union movement was strengthened to help workers. The depression also changed the political landscape of the nation into this century. An endless array of laws was implemented to address the causes and effects of the depression, including stock market controls. The stock market crash did contribute to it. Stock market losses did cause a pull back in consumer spending and the Federal Reserve to increase interest rates. The roots of the Great Depression go back to a few years earlier and resulted from what many consider the perfect economic storm. Factors included the business cycle, over-speculation, a stock bubble, massive crop failures; trade wars, and government intervention. Still most would agree that the taproot and beginning of the Great Depression was the stock market crash of 1929. The beginning of 1929 saw a nation in a boom economy with a record GNP. Car production had doubled in 1929 from its 1923 level. Real income per capita had reached new highs and the newspapers were filled with stories of excessive spending. Speculation was also at an all time high. Margin leveraged accounts were at record highs as well. To facilitate investment, the Federal Reserve for years had been following a strategy of easy money. Consumer credit was rising dramatically. Interest rates for margin accounts were moving higher reaching over 20 percent. Many small investors were speculating as many stock were selling over 30 times earnings. People were talking of a new economic model were all would become rich in the endless growth of the American economy. Clearly there was a stock market bubble. On September 3, 1929 the Dow Jones industrial average hit a record high of 381. The Federal Reserve had issued warnings of over speculation and had started to tighten money, unfortunately, the New York Federal Reserve broke ranks injecting massive amounts of cash for margin stock accounts (this type of rogue behavior would be addressed after the depression). The availability of call money made big investors over confident about the stock markets setbacks in September of 1929. Market started to show true signs of instability in October of 1929. On Black Thursday, October 24, the market moved lower on record thirteen million shares traded. The big and mostly widely traded companies lost an average of over 10 percent, triggering the first wave of calls on margin loans. The President and major industrialists jumped in with positive statements. Then on Black Tuesday, October 29, 1929, the market crashed to 40 percent of its high a month earlier. As banks recalled loans panic set in and the great crash entered into American legend. The Federal Reserve, business leaders, and politicians made the right moves to stop the economy from going over the cliff. Things did stabilize as the economy moved into 1930. The quick easing of money put off the banks till later 1930. There was even a brief recovery in the first six months of 1930. However, the indicators were showing a decline in economic activity. By the end of 1930 and into 1931, bank failures and panics started with the now famous lines of panicked depositors. Bank failures were 659 in 1929, 1,350 in 1930, and 2,293 in 1931. The banking problems spread in 1931 with a doubling of bank failures and mortgage bankruptcies. The New York money crisis had once again spread across the country and Europe as seen in previous panics. Deflation rapidly lowered house prices and reduced grain prices, which hurt farmers. Farm prices had dropped 40 percent from their 1926 high. The government tried to pour money into creating demand. Social problems started to mount as unemployment hit 17 percent in 1931. Congress passed the Smoot-Hawley Tariff Act creating historic tariff rates. Still, it was not the American tariff rates so much as a rush by all countries to protect their home markets. The combination of deflation, low farm prices, and tariffs cut imports 40 percent. In 1932 as the Dow hit 95, America looked for a political solution with the election of Franklin Roosevelt and the New Deal Democrats. Roosevelt in 1933 imposed a bank holiday to stop panics and build new confidence in the banking system. More dramatic was the creation of the National Recovery Administration, which had sweeping powers to control wages and prices. The NRA created a national industry, similar to that of Stalin in Russia. The NRA would be found unconstitutional in 1935. In hindsight, most economics today see it as ineffective and a mistake. Still it at least stabilized unemployment and confidence. The Dow moved up from a low of 58. The Civilian Conservation Corps hired over 250,000 young men and at least prevented social unrest in the worst of the depression. From 1933 to 1934, Roosevelt used the time to implement sweeping social legislation such as National Labor Relations Board, which enforced the use of collective bargaining. Roosevelt tried a long array of approaches moving off and on the gold standard, credit regulation, mortgage aid, work projects, trade laws, reduced tariffs, increasing taxes, new banking regulations, and expand credit programs. In 1935, the New Deal Democrats looked for long-term social safety net, enacting the Social Security. The National Labor Relations Act of 1935 created unionization of the steel, rubber, and automotive industries, and wide spread collective bargaining. The government had successfully moved into energy production with the Hoover Dam and the Tennessee Valley Authority. Things never really improved and in 1937, the economy slipped into a “depression within a depression.” This set back came as the multitude of social programs took large amounts of money out of circulation. Taxes slowed capital investment. And union-creating laws had caused wages to jump 11 to 33 percent, making things costly and bringing down demand. Another complication was the devastation of American agriculture by the Dust Bowl. The climb out of this second dip was slow. Unemployment went from 18 percent in 1938 to 14 percent in 1940, as war production would finally bring American industry back to life. Arguments and analysis of the causes and solutions for the Great Depression continue to this day. Its impact on the nature of American business was however deep and lasting. see NEW BOOK!! http://www.amazon.com/Most-Significant-Events-American-Business/dp/0313398623/ref=sr_1_10?ie=UTF8&qid=1339505966&sr=8-10&keywords=skrabec