Many scholars found an impenetrable mystery in
what caused the 1929 Crash of the securities markets,
and believe this caused the great subsequent Depression.
I would not take this position.
The Wall Street Panic carried earmarks of other panics.
The Depression had as many demonstrable causes
as every large social event, such as a war.
Of course, neither Panic nor Depression had the perfect
predictability that the man on the street may think, absurdly,
to be the earmark of science. Not even after a
thousand retrospective studies can one say that
it would have been possible to predict the date,
intensity, scale, progression, exact effects of the initial
event, or even tell the moment when
the event happened.
Why the nation could not crawl out of its
economic abyss without the help of a
huge war is another matter, a puzzle that
we should be able to explain but cannot.
True to a thesis of this book, I am maintaining that the
United States - never mind comparisons with
other countries - has been in bordering upon economic chaos
over most of its history, and the Depression marked
therefore a much deeper trough.
Let us advert to the Wall Street Crash of 1929.
In that year, if the country's economy were steered by
any group, this group would be some small portion of the
million and a half people who were involved with
stocks and bonds - owners, operators, and clients
altogether organized in several weak sub-systems
elsewhere, but concentrated in New York, and
loosely called Wall Street.
About five-sixths of these, probably 85%,
acted merely as a consuming public and participating
audience. They bought and sold and gossiped,
made sure that all the world heard that the most
important things in the world were
happening on Wall Street.
Farmers, workers, most of the middle and poorer classes
outside of New York and the securities markets elsewhere,
most politicians - in all some twenty-nine out of thirty households
in the country had little or nothing to do with Wall Street.
Most of these feared and despised
Wall Street; it seemed to them a gambling den,
where cheating was common and a few
rich men controlled operations.
On the other hand, white-collar migrants to the cities and
offspring of recent immigration were delighted with
the Wall Street spectacle and could hardly contain
themselves from plunging into this marvelous new
American experience; next to the streets being
paved with gold, this was it.
As I pointed out earlier, much of the country was in a
stagnant and serious depression all during the twenties,
and the image of a prosperous decade was a fraud so far as
they were concerned. The Wall Street crowd,
which included the top plutocrats and politicians of
the country, believed that the country had few material
problems that would not shortly be solved.
The poor, immigrant, Black, and disadvantaged of the
twenties were for them a laughing stock - witness the
vaudeville, movies, radio, and press of the age.
They were non-entities in the public eye, non-existent
beings, whose multitude was psychically and physically hidden.
When these outsiders annoyed, they were treated as subversives.
In fact, even insiders of the group risked being seen
as traitors when they violated the rosy consensus.
The best social economist of the country, Thorstein Veblen,
had set a precedent by getting himself fired from
Stanford University for his diatribes
against conspicuous consumption and the plutocracy.
He ridiculed the American middle-class woman for being an
expensive toy of her husband's consumerism.
To be sure, he was accused of having more fun with sex than was
allowed, and his neck of the woods near the campus was
maligned as "Sin Alley."
In millions of repetitive selfsame phrases, the capitalist
chorus sang that an endless prosperity was upon the
country and that stock markets would continually rise.
The press and financial community passed along
happily the hype of economists like the old boys of the
Harvard Economic Society, Professor Irving Fisher of
Yale, and Joseph Stagg Lawrence of Princeton.
In retrospect, it is astonishing how rare were the voices -
whether of economists, editors, investors, consultants,
business moguls, ministers, or politicians -
that claimed to see large economic troubles ahead.
(By "rare" one means that you could audit all mass media
for any month between 1925 and 1929
and come across only one or two gloomy voices.)
An entire elite was deluded.
Stock prices rose steadily.
Companies were increasingly over-valued.
New companies were formed without assets or
prospects to justify the high values of their shares.
Holding companies were formed that pyramided
skyward, the earliest or base company holding only
enough of the one erected above it to exert control, and
so on with additional corporations
until a set of huge securities issues
owning nothing tangible except the stock of
other companies, rested in the hands of
the few owners on top.
These men usually were innocent of any knowledge of the business
that at bottom they controlled; the total ownership, except for the
minority interest in the bottom productive entity, was insubstantial.
But, of course, the stock prices of the productive businesses of the
country mounted rapidly, too; not only were they being bought with
great sums of levered funds and credits, but also investors might
well reason that if weak companies were rising so fast in value,
strong old companies were worth all the more.
Thus, Samuel Insull, born in England, employed as a skilled clerk at
Edison's laboratory on arrival in America, then on his own time
become the head of a string of companies producing electricity for a
vast region including Chicago, could boast of having created a
unified electric grid where before chaos ruled.
He was correct in this.
His only problem came with the collapse of Wall Street.
His layer upon layer of watered stock avalanched when the
securities of the basic companies fell in price and the
leveraged stocks of the holding companies
above fell as well. He fled to England in 1932.
He was sent back for trial, acquitted of fraud.
He died in disrepute, he who had been a
king of Midwest politics, industry and finance.
Leveraged stocks, carried on the tide of rising
expectations, accounted for many quick fortunes.
Another way to lever was to buy stock on margin,
paying down therefore only a portion of the
sales price, then awaiting the rise in
value of the stock to have enough margin left over to
buy more stock of the same or another type, in
infinite series, the speculator hoped. His broker
was usually doing the same with personal funds and any
other funds he could lay his hands on.
As the demand for loans increased, the banks got into the
business of lending to brokers, using the stock that was being
purchased as collateral for the loans.
We can see how the three large classes of fools were
prancing on the thin wire of stocks,
believing it strong enough to hold any amount.
Few asked how well the industrial operations
at the basis of the economy and the stocks were doing.
More and more companies were behaving erratically,
now profitable but then less so.
Tradition and logic required that there be a close
association between the price of a share of stock and
the share of the profitability of the company
it represented. (The price-earnings ratio.)
The gap between the two indicators yawned wide.
The market paid little attention.
This simple fact, observable to all the world,
should have been able to ward off the boom and bust.
But frenzied feeding lost all logic in snapping up certificates.
Anyhow, there were really no tools for cutting back the boom,
if anyone would have dared to try such.
A timid effort was made to raise interest rates,
at too late a stage to be effective;
by this time banks were deep into money-lending and
money was being borrowed at costly rates, but
what did even 11% matter, if one was "sure" to
profit 100% in a year?
Fundamental mistakes of public policy were being made
elsewhere. One error was that of the Prince of Errors,
Winston Churchill, Chancellor of the Exchequer,
who added to his past disasters, including the
Gallipoli campaign of World War I, and
who was to have a hand in future gaffs, by
rigging the British Empire to the gold standard at a
time when the world needed expanding trade.
The British recession was severe; the country suffered a
general strike in 1927. One effect of
giving the British pound too high a value was to
depress British and therefore world trade.
(Britain was still a paramount influence in the
much smaller world economy of the times.)
The British then put heavy pressure on the American
government to reduce interest rates,
which was done, but most of the money thus
released from bond-age ran over to the stock markets
instead of into English investment,
aggravating the boom.
Congress, with a compliant President Hoover, passed
the sky-high Smoot-Hawley Tariff schedule,
destined to keep a great many products of the world from
reaching America, but, just as surely,
to keep the products of America from reaching the
rest of the world. American exports plummeted
40%. United with the restrictive immigration laws,
that kept the cheapest efficient labor sources in
Europe and Asia, the tariff would assure Americans of
higher prices for everything across the board and
The governments - whether that of the nation under
Herbert Hoover and the Republican Congress, or that of
Governor of New York Franklin Roosevelt and the
New York State Legislature - were
unconcerned. Hoover, to give him the small
credit owing, refrained from joining in the chorus of
enthusiasts for the Wall Street mania;
unlike Theodore Roosevelt, he would not lie
even when events soured, when he was begged to
make the kind of deceptive and frantic statement the
great leaders of the economy were making - including
old J.D. Rockefeller, enticed from
decades of seclusion by his son John D. to
affirm that they were buying their own Standard Oil
Company's stock, such a bargain was it.
(So weak was it, others might say, but
critics were stifled by the self-censoring press;
the family went in at 50 to stave off further decline,
and it ended in the low twenties.)
What was happening was this: after moving ever higher,
making millionaires by the scores every week, the
stock market began to pitch and yaw in the
beginning of 1929. In October of that year,
it collapsed in a series of steep falls.
October 24 seemed to be the worst;
no one could tell what was happening because of confusion on
the floors of the exchanges at the extremely heavy trading.
A somber and astonished crowd gathered on the streets,
as if to watch the sinking of the Titanic.
Tuesday, the 29th of October, was the worst of all.
Other markets around the world steeply declined;
markets in commodities in Chicago and elsewhere
pitched down; bond prices, instead of
contradicting stock prices as they were supposed to do,
dropped as well.
Nobody wanted paper values any more,
except gold-backed bucks. Very few people
committed suicide, perhaps because one's friends in this
ship of fools were sharing the dreadful experience.
Many men turned crooked in order to avoid
financial ruin. Many embezzlements that had been
concealed by gains now were exposed. The
head of the Stock Exchange was
ultimately arrested and convicted of
illicit peculations. Financial institutions and
brokerages bankrupted by the score,
individuals by the thousands.
All faces turned toward the captains, dear captains, the
lords of finance and business. The lords met when the worst
happened. They pledged to buy stock (just as would
foolish governments late in the century buy
their own depreciating currency at great loss to
themselves). This did not work.
After a contemptuous glance at the remedy,
prices kept on descending. The media chorused in
praise after every announced intercession, but the
little men whose hearts had been briefly raised
lost more and more of the little liquidity that
they still possessed.
The end came "not with a bang, but with a whimper."
The stock markets would not revive for a decade.
They never did rise of their own account, but
only because their underlying values rose,
owing to heavy government spending on
dreadful warfare (the good expenditures of the
government on welfare and work and reconstruction of
the country's infrastructure were woefully insufficient to
get the sick plutocrats back to work).
Like the High Command of armies in retreat,
the top leadership of Wall Street and its subservient
media regularly claimed in its eagerly read
communiques that the markets were turning around,
that underlying conditions were sound,
that now was a good time to invest in securities, and
ultimately in the cheery phrase of President Hoover,
"Prosperity is just around the corner."
Actually, by the time Hoover said this, the
country was thoroughly despairing. The panic that had
blown away the euphoria of early 1929 had
been succeeded by a leaden fear.
Frenzied trading gave way to lethargic activity;
prices dropped to one-twentieth of their 1929
level. By the time Franklin D. Roosevelt was
inaugurated in March of 1933,
his epic phrase could be
"the only thing we have to fear is fear itself."
The depression was profound by this time.
The Wall Street crash had caused a domino effect:
one institution fell upon another until
long rows collapsed. Hoover pointed out
consolingly that "we have passed through no less than fifteen
major depressions in the last century," and
foresaw the country emerging from this one more
prosperous than ever. He lent his support to the creation of the
Reconstruction Finance Corporation to
give loans to private corporations and
cooperative associations of business enterprises.
Although banks had failed at a disgraceful rate
during the twenties, about 600 a year, the
rate skyrocketed between 1929 and
1932 until 44% (11,000) of
all banks of the nation had failed.
As if to confirm that farming was a good business
to get out of, farm prices skidded by 53% between
1929 and 1933.
The Gross National Product, the sum value of
all goods and services of a given year, an
index devised long afterwards, when
retro-calculated, showed that from a positive
rate of several percentage points a year,
it had now in several years in succession
declined by 10% a year. (This extraordinary
turnaround for a nation's economy
would not be witnessed again until the Soviet Union
would collapse in the late 1980's.)
The greatest steel industry in the world was cutting back its
production to 12% of capacity.
National income was halved from $81 to
$41 billions. Ranks of the unemployed reached
14 millions, a quarter of the work force, but
it will be recalled that women and children were not counted
and the participation of the women in the work force was much
less than now. Because the construction industry had been
knocked to its knees, a Federal Home Loan Bank
system was erected to give it a lift.
State, county and city governments
operated under semi-bankrupt conditions.
Many schemes occurred and many abrasive
radical movements. The universities that had
hitherto been rest homes for the eternally
sophomoric, now burgeoned with liberals and socialists,
Stalinists and Trotzkyites, social gospelists.
But, too, the arts began to flourish in the
fallow soil. Numerous pretentious magazines,
often with tiny circulations,
were carrying a great variety of political messages,
none of them with much chance of success.
Father Coughlin, a Catholic priest, came on the air, and
began by preaching Social Justice, but ended
after several years in a dither of anti-semitism and
anti-Roosevelt, such that he was finally silenced
by Church authorities and disappeared from
public view, surfacing in the public
consciousness many years later to say that he was sorry
for all of that -- as if anyone cared any longer.
A voluminous literature on "Why the depression?"
blossomed and we should attend to the argument.
But let it not be forgotten that Americans had
depressions as often as the 7-year itch.
The US has not gone through history ever-prospering.
Beginning with the eighteenth century colonies and up to the
year 2000, half of the years have been
depression years. And in these years over half of the
population has suffered
material and psychological disturbances. And the
other half of the time, they worried about the
next downturn - rather like San Franciscans
worry about the next earthquake.
Economist Alvin Hansen depicted
10 major and 23 minor
economic cycles in the 80 years between
1857 and 1937.
Let us take further note that many years not slumped into
economic doldrums were years of wasteful and disgusting warfare;
the trumpet no longer blared to the cavalry,
but to the stokers and miners and clerks.
And we shall foretell here the longest period of prosperity
- save for small recessions: the Cold War!
Enormous military expenditures kept the
economy and its workers busy.
Call these fifty years of the latter twentieth century prosperous,
if you will, but they were economically and morally shameful.
Earth will forever suffer from them.
For all of the thirties, and then tailing out forever after, the
questions continued: how did it happen,
and why did it never stop?
Some blamed the farm depression; when farmers were
badly off, the whole economy had to follow suit;
not so, however, during the twenties and other times.
High tariffs were blamed; the Smoot-Hawley
Tariff legislation was incredibly badly timed, but
it was in the great Federalist and Republican tradition,
to which Democrats frequently added their voices.
No nation refrained from retaliating,
if it could find the means, the most obvious being
to bar American goods, another not so obvious,
to prepare for a war to guarantee one's own trading
area, as Japan in the Pacific,
Italy and France in Africa, etc.
Some said that the country was over-built, and the construction
industry was leading the country into depression.
Others said that industry had over-produced,
and inventories had to be un-stocked
before new production and re-employment could occur.
Other experts claimed that the many forms of
new technology in business and industry were bringing about
less and less need for workers;
man was being replaced by machine; the unions
especially liked this argument, for they could
see this happen to their membership where
they were unable to suppress
innovations in technology.
All of these had their elements of truth,
as did the theory blaming over-speculation
on the stocks and commodities exchanges,
including shady practices in the securities markets,
examples of which came to light every day.
There was no consensus as to causes;
experts were nonplused.
The President was also baffled.
Congress was as useless as the President.
It maintained law and order, true.
But the American people showed no sign of rebellion.
The population was too diverse to place faith in
any key element to organize and lead the charge.
Aside from individualism and
egalitarianism of a strangely self-denying sort in the
face of the success and riches of others,
it had no philosophy of social action,
not even slogans.
A parade of veterans dribbled into Washington
demanding a bonus, but were dispersed by troops under
General Douglas MacArthur, acting under
Presidential orders. For the memorial generation that
was to expire by the year 2000, the excruciating
trials of the Great Depression were peak times of
achievement, endurance, and even
fraternal cooperation: "Brother, can you spare a dime?"
So went one popular song. And another:
No more money in the bank,
No more babies we can spank,
What to do about it,
Let's put out the lights and go to sleep.
What to do about it - forty million Americans set about learning how
to live on next to nothing.