The Great Depression, Part One

Hopefully we won’t experience an event like the Great Depression ever again, but the subject is always appropriate, if for no other reason than to serve as a reminder that we need to be vigilant about economic matters and the excesses that can occur within our system. There are literally tons of books on the subject, as the Great Depression, traumatic event that it was, has been studied by many in the decades since it occurred. Economics is not an easily understood subject, and this blog is NOT the “definitive” history or analysis of the Great Depression. For a good overview of the Great Depression, I highly recommend Robert S. McElvaine’s “The Great Depression, America, 1929-1941.” His book doesn't use a lot of the economic jargon and all of the technical talk that few of us understand. It is more of a history, than an economics book, but with easily understood economic information. I also highly recommend the chapters on Herbert Hoover and Franklin Roosevelt in “The American Political Tradition,” by Richard Hofstadter.

Many years ago, I did a term paper on the Great Depression for an economics’ class in college (ah, that was well after the Great Depression, so no wisecracks). That doesn’t make me an expert, but it was and is a topic that has always held an interest for me; then too, when I was younger, most adults of the time had lived through that era, and the scars were still evident. In those times, you seldom heard the term “The Great Depression” used by average folks; it was simply “The Depression,” and everyone understood exactly what that meant. When the stock market was mentioned, some folks still cringed, even though they never owned a share of stock in their lives, nor even really understood about stocks in general, but the memory of “The Crash” was still vivid in their memories.

The early 1920s saw a sharp economic downturn, brought on by the economic adjustments of post World War One, then known as “The Great War.” (Hey, if you called it World War I back then, that assumed that there would by at least a World War II, if not a whole series of world wars, and The Great War had also been given the “subtitle” of “The War to end wars,” an admirable but naïve notion.) The President of the United States at the time, Warren G. Harding, not known as one of the stellar leaders of our history, took action, although minor action by today’s standards. You must bear in mind that in those times “tampering” directly with the economy by government was a no-no. The Government just didn’t do it, and this was not a Democratic or Republican idea, but just plain old economic orthodoxy. Harding, however, had appointed one of the best known men in the world as his Secretary of Commerce, one Herbert Hoover.

Hoover, born in Iowa, was orphaned at an early age and was then raised by his strict Quaker relatives. He attended Stanford University and became an engineer, not the “choo, choo” kind, but a mining engineer. While at Stanford, Hoover served as class treasurer (I believe that was the position, if I remember right), and this was his only “elective” office, if you can call it an office, that he held until he was elected President of the United States. He supported Teddy Roosevelt’s progressive third party candidacy in the election of 1912. He started out making two dollars a day in mines, as I recall reading, but he later was promoted, and later still owned a mining company himself. Eventually he became worth somewhere in the neighborhood of four million dollars, which would be nice to have even today, but it was a VERY considerable sum in those days, and also a considerable sum for a man only in his thirties to have earned.

He was given a position in Democrat Woodrow Wilson’s Administration, and although he didn’t disclose his political affiliation, most people thought him to be a Democrat. During “The Great War,” even before America became formally involved, Hoover was given a crucial role in providing food and essentials to people, first in Belgium, later elsewhere in Europe. It has been said that Hoover and his workers helped save the lives of millions of people. He became a worldwide hero, even having streets named for him in foreign countries. When Harding was elected president in 1920, he named Hoover to be his Secretary of Commerce. Hoover, a workaholic, made the Commerce Department one of the premier agencies of the Federal Government by gathering business statistics and information to follow economic trends. It is my understanding that many of his innovative ideas continued at the Commerce Department for many decades after he had left the office.

Hoover was working on theories to combat economic downturns and one of his ideas was to provide temporary work, such as public works jobs, to provide employment to those who had lost jobs in the private economy; thus the workers kept much of their purchasing power. When the economy turned down in Harding’s first year as president, Hoover persuaded him to provide public works employment, which he did. The program was VERY modest by any standards we’ve used since those times, but the significant thing was, it was a new idea; even a bold idea. The economy recovered in less than a year, although how much Hoover’s small public works program helped is debatable. Thereafter began what came to be called “The Roaring Twenties.” Many new electrical appliances and devices, as well as Americans’ developing love affair with the automobile, helped send the economy soaring to new heights. The problem was, not everyone shared in the economic boom of those times.

One of the big problems within the American economy during the 1920s was in agriculture. American farmers frequently produced more foodstuffs than was good for their own financial well-being. During and for a while after the War, our farmers planted an abundance of crops, since they were helping to feed many people in Europe. Gradually, as Europe recovered, Europeans needed less and less American farm products, but our farmers kept planting too many crops, and consequently, agriculture prices plunged and remained low throughout the rest of the decade. As is frequently the case, this event didn’t happen in a vacuum, and as America’s farmers struggled to stay afloat, banks, especially those in agricultural areas, found themselves in trouble, too. Keep in mind, during our history, the percentage of Americans engaged in, or in a fairly major way connected to, agriculture has been decreasing, but during the 1920s, the percentage was far, far greater than it is today; thus when farmers sneezed, many others caught cold.

There were literally hundreds of thousands of banks in America during that era. Many were small and served rural areas and small towns. These were NOT the banks we think of today, with a relatively few large bank holding companies controlling so much of the banking industry nationwide. If you remember the banks depicted in many of our Old West movies and television shows, like “Gunsmoke” or “Bonanza,” those banks were more typical of many small communities, and even of the neighborhoods of large communities of those times. With so many farmers in financial trouble, the banks in agricultural areas suffered, too, as farmers were a big part of their business. While many Americans were experiencing the “Roaring Twenties,” thousands of mainly small banks were failing. While most Americans paid little notice to the ongoing failures within the banking system, it was an ominous sign of things to come further down the road.

Over time, some farmers gave up, or lost their farms, and moved into towns and cities, where many took jobs in America’s growing manufacturing sector. While there were still many areas of the country without electricity, radios, washing machines, and refrigerators were some of the new products that captured the attention of so many Americans, and American industry had these products and many others rolling off the assembly lines. The wages of many Americans weren’t all that great, but another marketing technique was quickly catching on; “buy now, pay later,” “by on time,” “put it on tick;” that is, credit. Up until then, credit was NOT a common way to buy things; in fact, it went against the grain in many folks. (Just compare that to today, where the average American owes thousands of dollars in credit, and that doesn’t count mortgages.) With most appliances and automobiles costing more than average people could afford to pay cash for, businesses opened charge accounts to allow the purchase of products with customers making regular payments over a period of time. The desire for many of the new goods of the day overcame the “pay cash” upbringing of many folks, and they opened charge accounts; products flew off of the shelves and out of the showrooms of businesses around the country.

All of this business activity and the accompanying profits had some people looking for a way to cash in on the booming economy. The stock market gradually caught the attention of many, and stocks in all of the major companies took flight to the upside. With many folks raking in good profits on Wall Street, other Americans began to test the waters. What was working for people to buy refrigerators was now used for people to buy stocks, credit; it was called “margin,” or “buying on the margin.” The idea was, if you wanted a thousand dollars worth of stock, you put up one hundred dollars and the balance was “secured” by the value of the stock. As the stock market boomed, no one seemed to consider that stocks would ever go anywhere else, but up in price. More and more Americans joined the frenzy on Wall Street. But what if stocks actually came down in price?