Study Notes on the Great Depression and Early Responses by the Hoover Administration
The Great Depression: Economic Context and Early Impact
Historical Background
In the spring of 1929, President Calvin Coolidge declared the economy was
"absolutely sound"
Stocks were "cheap at current prices."
President Herbert Hoover, more cautious and economically knowledgeable, viewed
The growing tide of speculation as a crime.
Hesitated to voice concerns publicly due to fear of losing confidence in the economy.
Warnings About the Market
Roger Babson, a respected economist, warned in September 1929:
"Sooner or later a crash is coming and it may be terrific."
Predicted factory shutdowns and mass unemployment.
Babson's warning led to a brief drop in stock prices known as the "Babson Break."
Most economists dismissed Babson's prediction as erroneous.
Stock Market Surge
Summer of 1929: Stock prices surged, with notable increases:
Westinghouse: from 151 to 286
General Electric: from 268 to 391
U.S. Steel: from 165 to 258
Investor optimism overshadowed earlier warnings with a marked rise in stock prices.
Stock Market Crash
The apex of stock prices occurred the day after Labor Day in 1929, followed by a downturn in September.
The worst day in stock market history occurred on October 29, 1929, known as Black Tuesday.
Contrary to myths, while some speculators tragically took their own lives, most investors lost wealth quietly.
Stocks continued to plummet in the months that followed, with significant fall-offs:
November 11, NY Times Industrial Average closed at 224, down from 132 in September.
By July 1932, the Dow Jones Industrial Average had fallen to 58, a mere tenth of its previous value.
Consequences of the Crash
Loans enabled investors to buy on margin, worsening the situation:
If stock values dropped to the margins (e.g., 50% or 25%), brokers demanded more funds to cover loans.
Many investors lacked additional funds post-crash, leading to financial ruin.
Brokers lost money as they often failed to sell stocks in time to cover loans.
Wider Economic Fragility
The stock market crash was merely reflective of broader economic weaknesses in:
Banking
Manufacturing
Farming
International trade
Affected groups included:
Farmers and farm workers, American Indians on reservations, factory workers, and the elderly, leading to widespread poverty.
Statistical Overview of Poverty
In 1930, 60% of families earned less than $2,000 per year, the poverty line at that time.
Between 1929 and 1932, farms were foreclosed, and many were unable to prevent such sales.
Unemployment statistics reached alarming levels:
One in four Americans were out of work by 1932.
Banking Collapse and Protests
U.S. banking system began to collapse in winter 1932-33, resulting in:
Banks failing due to stock investments and uncollateralized mortgage loans.
State governors initiating "bank holidays" to stem the tide of failures.
The Bonus Army emerged in 1932 as a protest, comprising World War I veterans seeking early payment of service bonuses, leading to their violent dispersal by U.S. Army troops.
Hoover's Presidency and Initial Responses
The Hoover Years (1929-1933)
Herbert Hoover's early presidency coincided with the stock market crash—he faced immense challenges.
Background: Hoover was an engineer and had experience in economic matters, previously serving as Secretary of Commerce.
Hoover called for voluntary collective actions:
Encouraged business leaders to keep wages and prices steady.
Urged bankers to support one another.
Promoted farming cooperatives to mitigate overproduction.
Government Interventions
Initiated federal public works projects (e.g., dams, bridges) to engage the economy.
After 1932, Hoover supported the Reconstruction Finance Corporation, aimed at averting bankruptcy for banks and railroads, and the Emergency Relief and Construction Act to fund state relief efforts.
Challenges to Hoover’s Policies
Voluntary measures met with reluctance; farmers and bankers were hesitant to collaborate.
Lack of sufficient investment from the Reconstruction Finance Corporation meant many banks continued to fail.
Hoover's attempts to negotiate reduced reparations for Germany failed, impacting U.S. international trade.
Smoot-Hawley Tariff (1930)
Intended to protect American industries by raising import costs, but resulted in reciprocal tariffs and a trade war—dramatically reducing international trade and exacerbating economic issues.
Public Perception
People blamed Hoover irrespective of his actions; his assertion of economic soundness in harsh times only hurt public confidence.
Makeshift communities for the homeless were derisively named Hoovervilles, undermining his reputation further.
Legacy
Hoover's presidency faced challenges of public opinion, economic turmoil, and limited government intervention.
Ultimately lost reelection and attempted to encourage the incoming administration, but his efforts were largely ignored.
The New Deal: FDR's Response
Political Context
The dire economic situation in 1932 led to the presumption that whoever became the Democratic nominee would likely win the election.
Key candidates included:
Al Smith, John Nance Garner, Newton Baker, and Franklin D. Roosevelt.
Nomination and Acceptance
Roosevelt won the Democratic nomination and famously accepted it at the convention in Chicago on July 2, 1932, by promising a "New Deal for the American people."
Garner was selected as Roosevelt's running mate; they gained support through their vague promises of reforms.
Election Victory
Roosevelt's campaign was triumphant, securing 57% of the popular vote and 472 electoral votes against Hoover.
Transition Period
Between election and inauguration (originally March 4, 1933, now January 20 post-20th Amendment), the economy worsened.
Unemployment and bank closures increased, necessitating urgent action.
Banking Crisis
Banks held many non-repayable loans, leading to widespread failures:
1,352 banks closed in 1930,
2,294 in 1931,
1,453 in 1932.
State responses included declaring bank holidays to avoid further collapse.
Inaugural Address
Upon taking office, Roosevelt acknowledged the economic struggles:
Cited the failure of economic rulers to handle the situation.
Emphasized a belief that fear itself was a barrier to progress and action.
Roosevelt depicted a willingness to act boldly to address the crisis, fostering initial optimism among citizens.