Black Tuesday

[Mr. T]

The famous Black Tuesday was on October 29th, 1929. This is the date of the most famous stock market crash in history.

 

The Crash and the Great Depression It seems as though we have seen this back in October of 2008 when McCain & Obama both had to leave the campaign trail to cast votes on Bank Bailouts, while the DOW continually kept going down.

 

The Crash

 

Most economists of the 1920s believed that the stock market--not housing starts, sales of durable goods, or the financial health of banks--was the chief indicator of the fiscal health of the United States. In September of 1929, stock prices began to fluctuate, but market analysts dismissed this as temporary. What many of these analysts did not realize--or refused to admit--however, was that stock prices were totally out of proportion to actual profits. Sales of goods and the construction of factories were falling rapidly while stock values continued to climb. Still, very few were worried; they still accepted Adam Smith's "self-adjusting economy" as dogma and believed the problems would correct themselves.

 

Historians refer to October 24, 1929 as "Black Thursday." On this day, people began dumping their stocks as quickly as they could. Sell orders inundated market exchanges and the bull market suddenly shifted to a bear market. By that evening, J.P. Morgan and other financiers bought up stock to stop the panic and keep the market afloat. On Friday, October 25, the House of Morgan continued to keep the market stable and it seemed that the panic was over. Yet, many investors began to worry during the weekend. George and Martha and thousands of their friends decided to sell whatever stock they still had as soon as the market opened on Monday. As a result, on Monday, October 28, there was another wave of sell orders. The next day, October 29, 1929, "Black Tuesday," was the beginning of the Great Crash.

 

 

"Black Tuesday" was the single most devastating financial day in the history of the New York Stock Exchange. Within the first few hours the stock market was open, prices collapsed and wiped out all the financial gains of the previous year. Since most Americans viewed the stock market as the chief indicator of the health of the American economy, the Great Crash shattered public confidence. Between October 29 and November 13, the day when stock prices hit their lowest point, over $30 billion disappeared from the American economy. This amount was comparable to the total amount of money that the federal government had spent to fight the First World War.

 

Still, optimism persisted and many leaders declared that the worst was over. J. D. Rockefeller said:

 

The Depression

 

So as not to alarm the public, President Hoover chose his words carefully when he discussed the state of the economy in 1929. American economists and politicians had referred to previous economic downturns as "Panics," such as the "Panic of 1873" and the "Panic of 1893." Hoover, however, called this latest downturn a "Depression" rather than a "Panic," and the name stuck.

 

Of course, America was not alone in the Great Depression; it struck all the industrialized nations of the world, including Germany, Britain, and France. Moreover, Germany still had huge reparation payments to make to the Allies in the aftermath of WWI. These reparation payments fueled spiraling inflation in Germany and crippled that nation's economy. The Allies themselves had borrowed money from the United States during the war, were unable to pay it all back during the 1920s, and were now not only broke, but in debt.

 

Social Problems

These perplexing economic problems in the United States exacerbated a host of social problems, including:

 

• Unemployment and poverty

 

Breakdown of families

 

Soaring high school dropout rates (2 to 4 million)

 

Homelessness

 

Organized protests

 

Around the country, the homeless built settlements of cardboard and tar-paper shacks, called "Hoovervilles" in sardonic reference to President Hoover.

 

Farmers armed with guns and pitchforks marched on the local banks to prevent foreclosures.

 

"The Bonus Expeditionary Force." A group of WWI veterans who had been denied their pensions organized the first march on Washington in protest. In 1932, twenty thousand men set up a tent city, vowing to stay until they got their money. President Hoover overreacted and sent in the army (led by future war heroes Douglas MacArthur and Dwight D. Eisenhower) to break up this peaceful demonstration.

 

However, the Crash was not the immediate cause of the Depression. It alone was not responsible for a decade of worldwide economic catastrophe. But what was responsible for the Depression? And what were the long-term consequences of the Great Depression in the United States? The Depression itself was responsible for a dramatic transformation in the structure of American politics, for a change in Americans' expectations about government, and for a shift in United States foreign policy during the 1930s.

 

"The New Deal"

Liberalism at High Noon: The New Deal

 

Cracks in the Economic Foundation

After the Great Crash, the American public sought a scapegoat for the economic collapse. Some held President Hoover responsible, others targeted the "three B's"--brokers, bankers, and businessmen. But the cause of the Great Depression could not be attributed to one individual or even a group of people. The roots of the Great Depression were in the very structure of the American economy, namely:

 

1. Unequal distribution of wealth and income.

Despite rising wages overall, income distribution was unequal. Gaps in income had actually increased since the 1890s. The 1% of the population at the very top of the pyramid had incomes 650% greater than those 11% of Americans at the bottom of the pyramid. The tremendous concentration of wealth in the hands of a few meant that continued economic prosperity was dependent on the high investment and luxury spending of the wealthy. However, both the high spending and high investment of the time, much like today, were susceptible to economic fluctuations; they were much less stable than people's expenses on daily necessities like food, clothing, and shelter. Therefore, when the market crashed and the economy tumbled, both big spending and big investment collapsed, as well.

 

2. Unequal distribution of corporate power.

From the late 1870s on, there had been an ongoing movement of business consolidations and mergers in the United States. During WWI, many potential commercial competitors merged into huge corporations like General Electric and eliminated competition in major American industries. In 1929, two hundred of the biggest corporations controlled 50% of the nation's corporate wealth. This concentration of corporate wealth meant that if just a few companies went under after the Crash, the whole economy would suffer.

 

Some quick definitions:

 

Trust - A combination of firms or corporations, that is now illegal, organized for the purpose of reducing competition and controlling prices throughout a business or industry.

 

Holding company - A company that controls other companies. During the 1920s, holding companies came to replace trusts.

 

3. Bad banking structure.

In the 1920s, banks were opening at the rate of four to five per day, but without many federal restrictions to determine how much start-up capital a bank needed or how much it could lend. As a result, most of these banks were highly insolvent. Between 1923 and 1929, banks closed at the rate of two a day. Yet, until the stock market crash in 1929, the nation's seemingly inevitable prosperity helped concealed the potentially fatal flaws in the American banking system.

 

4. Foreign balance of payments.

World War I had turned the United States from a debtor nation into a creditor nation. In the aftermath of the war, both the victorious Allies and the defeated Central Powers owed the United States more money than it owed to foreign nations. The Republican administrations of the 1920s insisted on payments in gold bullion, but the world's gold supply was limited and by the end of the 1920s, the United States, itself, controlled much of the world's gold supply. Besides gold, which was increasingly in short supply, countries could pay their debts in goods and services. However, protectionism and high tariffs kept foreign goods out of the United States. Recall from Lecture 15 that the Hawley-Smoot Act (1930) set the highest schedule of tariffs to date. This protectionism produced a negative effect on United States exports: if foreign countries couldn't pay their debts, they had no money to buy American goods.

 

5. Limited or poor state of economic intelligence.

Most American economists and political leaders in 1929 still believed in laissez-faire and the self-regulating economy. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses couldn't keep up high employment for long when they weren't selling goods. There was a widespread belief that if the federal budget were balanced, the economy would bounce back. To balance the budget demanded no further tax cuts (although Hoover lowered taxes) and no increase in government spending, which was disastrous in light of rising unemployment and falling prices. Another problem with economic practices of the day was the commitment of the Hoover administration to remain on the international gold standard. Many analysts implored Hoover to increase the money supply and to devalue the dollar by printing paper money not backed by gold, but the president refused. Going off the gold standard was one of Roosevelt's first actions when he entered the White House in 1933.

 

 

Note: even after the new deal there was 10 years of recession to follow.

 

 

 

 

 

 

 

 

[calfoxwc]

With freedom and free markets, there are fluctuations. Sometimes

crashes, hard times and good times.

 

But like the Soviets found out, even with the biggest, most dominating gov over peoples' lives,

every aspect of them...

 

The Soviets ended up bankrupt, with a major proportion of their populace dealing with

depression and alcoholism, and a desperate yearning for freedom.

 

Nice article, T !

[Westside Steve]

Funny this comes up because John and I were just discussing how history is repeating itself.

Hoover sent the country over the cliff and Roosevelt had to clean it up.

W has made a mess of the country and now Obama has to clean it up.

Hopefully the country will rebound quicker this time.

 

Then again all you remember is the R or D after the names and not the policies.

 

Hoover behaved like a democrat would and raised taxes and regulated like a motherf*cker.

Made a recession into a depression.

FDR kept it going way longer than it should.

But pulled us out with a huge war.

 

There's the ticket.

Party fundamentals change over a half dozen decades.

WSS