The Great Depression And Its Downward Economic Spiral: Part 1

“Those who fail to learn from history are doomed to repeat it.”-Sir Winston Churchill

In my previously published article series we examined the Panic of 1819 and the precedent it set for the bigger financial meltdowns that would come. We also examined the “Postwar Boom Period,” of the 1920’s about how economic growth created successful business profits which raised the standard of living for most Americans. As a result of this prosperity, Americans had enough spare cash to get involved in real estate speculations and stock market investments. A wave of chance taking swept the nation. Everywhere there was uncontrollable wasteful spending and powerful profiteering. In one of his campaign speeches President Hoover said: “…we shall soon, with the help of God, be in sight of the day when poverty will be banished from this nation.” Oh yes, things were certainly looking nifty. America belonged to the businessmen. It was theirs to exploit to the fullest. As a result of growing consumer credit, Americans were able to buy many more luxuries than they could afford. American businessmen and financial experts felt too confident that erratic fluctuations in the business cycle were finally under control. Their confidence and cockiness fogged their judgment to the point that they failed to see the danger signals that were everywhere. Nonetheless, they were so convincing in their future predictions that even President Hoover was taken in by what they said. It was a terrific time for him to assume office. Business was strong, the American people were enjoying prosperous lives, industry was thriving and the biggest stock market boom in the history of the United States was almost into its fifth year. He swelled with pride as he entered his first term, addressing the nation, “I have no fears for the future of our country. It is bright with hope.” Little did he know, his troubles would begin in late autumn of 1929. He would end his fourth year as an object of scorn and ridicule as the depression deepened. Voters felt that he was a “do-nothing” president who helped cause the Greatest Depression America has as of yet ever faced. This article, part 1 of a 3 part series, covers the beginnings of the mother of all economic meltdowns, the Great Depression. Parts 2 and 3 cover the Depression itself and its effects on America and the history of this great nation.

Some Warning Signs of Economic Difficulty Ahead

Already in 1928 at least 549 banks closed their doors and the funds of thousands of depositors were frozen. This was seen especially in Florida where the land boom collapsed as a result of the devastating hurricane of 1926. In comparison to the previous years, residential construction throughout the nation was dwindling which directly affected the industries that supplied them with materials. Though business inventories had tripled, by 1929 consumer spending was already slipping. Yet the stock market continued to flourish. Unconstrained speculation began to worry financiers and the president also, though he unsuccessfully urged the New York Stock Exchange to suppress the maneuvering of securities. Economic experts were personally advising their friends to get out of the market before the crash came. Stocks were being forced up to mind-blowing prices by speculative buyers. People were borrowing money from banks to continue investing into the speculative markets instead of into businesses. Inflation was out of control, especially with regards to credit. The American banking system had long refused to exercise self-control and was heading for trouble. The roller coaster ride was now in its final stage, inching its way towards the peak as industrial production, labor and commodity prices began a steady decline. As the stock market began to behave erratically during the months of September and most of October of 1929, the roller coaster finally positioned itself for the downward plunge.

The Beat Down of the American Dream

The Panic of 1929 and the ensuing depression were the most terrible the country had ever suffered. The stock market crash in October 23, 1929 wiped out an average of more than a billion dollars worth of paper values a day. When the stock market crashed there was almost $11,000,000,000 in loans placed against speculative stocks. After the crash, there was a mad scramble to get liquid. Panic selling prevailed. By the end of the day on October 29, 1929, a record of 16,410,030 shares had been sold with a total loss in value of 880 issues, which was roughly estimated to be more than $8,000,000,000. Investors by the thousands had entire fortunes wiped out. Millions of people invested in gilt-edged securities lost all their savings. Unemployment, which stood at 1,500,000 in the month of the collapse, had risen to 4,500,000 by October of 1930. A staggering total of 15 million were unemployed throughout the whole depression. Those who worked did so for extremely reduced wages. The flow of money into productive business slowed down to a trickle. The country was suffering from under consumption, not overproduction. Some attribute this panic to over-expansion and debt, overextended notes and discounts, over investment and falling prices. Banks were weighed down with government bonds, real estate mortgages based on exceedingly appreciated valuations and highly speculative securities. Mass hysteria reigned. Most government and business leaders kept insisting that the economic conditions were stable. Even President Hoover said in May, 1930, “We have now passed the worst and shall rapidly recover.” Although this prosperity propaganda was not true, it at least managed to put the nation’s fears momentarily at rest. It contributed to a booming stock market recovery during the first months of 1930 when the Dow Jones Industrial average went from a low of 198 to 294. Nonetheless, it was too late. The roller coaster had already started down a devastating downward economic spiral. There was no stopping to its incredible speed.

Devastating Effects and The Law of Attraction

The Great Depression, beginning in the United States had spread to most of the world’s industrial countries, bringing foreign trade to a standstill. There was a rapid decline in production and sales of goods. Thirteen to Fifteen million people were left unemployed as a result of plant shut-downs. Bankrupt businesses and banks closed their doors. Depositors who had entrusted the bank with their life savings discovered much to their shock and dismay that they were wiped out by the bank collapse. Americans were glued to their radios day and night in the hopes of hearing some news that the ordeal was over. Large numbers of concerned people, afraid that their bank would fail, would run to the bank and withdraw all their money. As withdrawals continued, bankers refused to borrow or give out any loans. As the Depression got worse, people lost faith in the banks. Those who had money and gold hoarded it. On December 11, 1930, the largest bank failure in the nation’s history took place when the bank of the United States closed its doors in New York City. Almost 400,000 depositors were affected by the bank’s failure. On December 23-26, 1930, the Chelsea Bank and Trust Company, with six offices in the New York region, was forced to close by a run that was started the day before. Three days later 20 small banks in six Southern and Midwestern states also closed. In 1931, there were 2,294 bank failures, twice that of 1930. Bank failures and the stock market crash reduced the whole of purchasing power.

On October 1, 1931 U.S. Steel cut the wages of 220,000 workers by 10 percent. Also, that same year, President Hoover in his annual message to Congress on December 8th called for increased taxation to make up for the deficit of $902,000,000 for the fiscal year of 1930-1931.

The American people were in a serious financial hole with nothing to grab onto to bail themselves out. Many had to depend on charity in order to survive. Farm and home foreclosures were at an all-time high. Everywhere Americans were suffering physical and emotional hardships. People were not buying. They just couldn’t afford to do it anymore. Gone was the exuberance of “the good old Days”. In Part 2 of this 3 part series, we’ll examine the effects of the Great Depression on America.

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