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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

We the People: Stock market crash not sole cause of Great Depression

By Jim Camden For The Spokesman-Review

Each week, The Spokesman-Review examines one question from the Naturalization Test immigrants must pass to become United States citizens.

Today’s question: When did the Great Depression start?

Although the stock market crash of 1929 is commonly blamed for starting the Great Depression – and would count as the correct answer on the Naturalization Test – the worst economic downturn of the 20th century actually began earlier and had more causes than the crash.

“There was no start date,” said Matthew Sutton, Berry Family Distinguished Professor in the Liberal Arts and History Department chairman at Washington State University.

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

For American farmers, the Depression started well before 1929. Prices for farm commodities had increased dramatically during World War I, a result of heavy demand and poor supply of products from Europe 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 the prices went down because of greatly increased supply and lower demand, they had trouble paying off those loans and many lost farms to foreclosure.

The 1920s were also a time of a growing economy with more houses being built and more consumer goods, like automobiles, refrigerators and telephones, being manufactured. That meant more jobs and more paychecks, along with more demand for the things being produced. But paychecks only stretched so far and expensive items often were bought on installment plans with monthly payments rather than purchased outright.

The post-war boom of the early to mid decade was beginning to slack off by the end of the so-called Roaring Twenties, and when demand for products began to wane, inventories grew and factories cut production which meant some workers were laid off.

More people began investing in the stock market in the 1920s and laws at the time made it easier to speculate on stocks. A person could open an account with a brokerage house and buy a stock on margin, putting down as little as 10% of the cost of the stock while borrowing the remainder from the brokerage or a bank. If the price went up – and some new investors were convinced the prices would always go up – an investor could sell the stock, pay back the loan to the brokerage and keep the profit made on the money put down as the original investment. If the price went down, they could be required to cover the full amount.

That type of speculation, in which a stock’s value is tied to demand rather than a company’s overall performance, only works as long as new investors keep entering the market and boost demand. By 1929, growth in investors flattened out at about 10% of American families. Experienced investors who sensed an end to the boom began taking their money out of the stock market.

On Sept. 3, 1929, the Dow Jones Industrial Average hit a record high of 381.17, and began to slip, with fluctuations for about a month.

On Oct. 24, known as Black Thursday, it dropped 11%. On Oct. 28, Black Monday, it dropped 13%. On Oct. 29, Black Tuesday, it dropped 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 hit its lowest point of 41.32 on July 8, 1932.

After losing roughly 89% of its value, the market wouldn’t recover to its Sept. 3, 1929, level for some 25 years.

The crash wiped out many investors – stories of people hurling themselves out of windows in despair are mostly urban legends – but by itself it did not cause the Depression because most of the country didn’t own stocks.

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

Black Americans had been dealing with poverty since the beginning of the country, said Sutton, who quoted a portion from Studs Terkel’s book on the Great Depression, “Hard Times.”

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

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

But more and more people weren’t working. The nation’s unemployment rate went from 3.2% at the end of 1929 to 8.7% at the end of 1930. It kept rising and hit a high of 24.9% by the end of 1933, according the U.S. Bureau of Labor Statistics.

Republican Hoover would go from a landslide winner over Democrat Al Smith to a landslide loser to Democrat Franklin Delano Roosevelt in four years. While he’s been long criticized for his handling of the depression, Sutton said he is 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 had to deal with a conservative Republican Congress for the first two years of his term, and a divided Congress in his second.

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

The crash showed not just the abuses of an unregulated market and trading on margin, but the flaws in the nation’s poorly regulated banking system, which had loaned much of the money for those trades. In some cases, the banks had invested their depositors’ money in stocks that were now almost worthless. Many banks’ cash on hand, or reserves, were dangerously low. When too many depositors tried to withdraw money, a bank would run out or “fail,” causing most customers to lose their money.

Bank failures doubled from about 650 in 1929 to more than 1,300 in 1930, and hit 4,000 in 1932, according to the Historical Statistics of the United States.

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

The economic upheaval was not confined to the United States, Sutton said. Other country’s banks also were poorly regulated and had market failures. The nations that lost World War I were required to repay 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 government changes 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 came up with new ones. Unemployment slowly began to fall into 1937, but between that May and June 1938 it experienced what’s known as the “Roosevelt recession,” when production fell again and the jobless rate climbed to 20%.

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

Unemployment in the United States wouldn’t drop below double digits until the end of 1941. At that point, the nation had entered World War II, drafted millions of men into the Armed Forces and ramped up defense production until the jobless rate fell below 2% by the end of 1943. The Great Depression was over.