Causes of the Crash 1919-1929

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Causes of the Crash 1919-1929

Issue Summary
Contributing Forces
Notable People
Primary Sources
Suggested Research Topics
See Also


The crash of the stock market in October 1929 was not so much the cause of the Great Depression as it was a confirmation that economic conditions in the United States had reached a crisis. The economic problems were long in the making, and a product of diverse factors that had worsened in the 1920s.

One of the key factors that influenced all the other factors in the 1920s was the lack of national economic planning or any other substantial form of active government oversight in the economy. The Republican administrations of Warren G. Harding (served 1921–1923), Calvin Coolidge (served 1923–1929), and Herbert Hoover (served 1929–1933) embraced a laissez faire philosophy. Laissez faire means being relatively free of government control or regulation. These presidents did not plan, nor did they attempt to regulate, banking, stocks, bonds, or other basic aspects of the economy. They also did not gather adequate statistics that, if analyzed, would have highlighted growing problems in stock market investing, agriculture, international finance, and buildup of inventories of consumer goods.

For much of the 1920s, the United States seemed prosperous. Many people were employed, and consumer goods—automobiles, appliances, furniture, and other commodities—flowed out of factories faster than ever. The satisfaction of America's workers was evidenced by the decline in membership and significance of labor unions. A number of Americans were gripped with speculative fever. They invested in unseen real estate, foreign currency, and even stocks in new companies that had yet to manufacture a good. This speculation at such a high level was clearly unhealthy. When the stock market began to plummet, some confronted it with disbelief. Others had already experienced depressed times.

Besides lack of government involvement and over-speculation in stocks and real estate, other possible causes of the Great Depression that have drawn attention include a widespread get-rich-quick mentality, overproduction and low prices for farm produce, a belief that national economies naturally decline in predictable patterns, and a large gap in wealth between the rich and common citizens. Each of these possible causes will be explored below. One fact stands out. The "big crash" was a clear warning sign of deep national economic troubles. These problems continued to worsen through 1932, and their effects stubbornly remained for another ten years.

Issue Summary

Whose Fault Was It?

Historians and economists have devoted much attention to the consequences of the Great Depression and its worldwide impact during the 1930s. For many years, however, little energy was devoted to finding the causes of the calamity that so seriously affected the lives of tens of millions of people. The most likely causes identified remain hotly debated into the twenty-first century. They include economic regulation by government, the occurrence of business cycles, the distribution of wealth, public attitudes about money, the unregulated stock market, a slumping agricultural economy, and the struggling international economy. The following factors have each been identified as possible causes.


British economist philosopher Adam Smith publishes The Wealth of Nations which greatly influenced economists and politicians through the twentieth century.
The New York Stock Exchange is founded by a group of 24 men under a tree in New York City.
Widespread war leaves European economies in disarray, while the United States emerges as an industrial leader.
November 1920:
Warren G. Harding is elected president, leading to 12 consecutive years of Republican control of the White House and strongly pro-business government policies.
October 24, 1929:
The first day of panic strikes Wall Street when 12.8 million shares of stock are sold, many at significantly lower prices than their value only a few days earlier. This day became known as Black Thursday.
October 29, 1929:
Wall Street has its only 16 million-share day, with 16,410,000 shares sold. The day became known as Black Tuesday.
March 5, 1933:
The New York Stock Exchange closes until March 14 for a national bank holiday.
June 6, 1934:
Congress passes the Securities Exchange Act to correct the problems leading to the October 1929 stock market crash.

Little Government Oversight of Business

Up through the nineteenth century a prevalent belief was that conducting business represented a basic form of property right that should be protected from any form of government regulation. Related to this belief, many rationalized that unrestricted economic systems would behave like a living organic system in nature. It would regulate itself to maintain a healthy condition. One form of self-regulation was propelled by the self-interest of business owners. British economist Adam Smith had earlier argued that the "invisible hand" of the marketplace would serve as a check and balance system in a nation's industrial economy. Smith contended that humans are driven both by personal passions to compete and succeed and a desire to self-regulate their actions, driven by the human ability to reason and sympathize. Because humans have this capacity to self-regulate, Smith concluded that economic markets should be free of government restraint. In Smith's economic model, the free market would be self-correcting and lead to a steady growth in national economics. Government involvement would only serve to inhibit this growth. Such was the birth of laissez faire government policy (business largely free of government regulation). This perspective was quite revolutionary in contrast to the centrally controlled economies of the feudal period in Europe in which craft guilds were the dominant organization for producing goods.

Smith's theories had been born during a time when small local craft industries dominated. By the late 1920s, about two-thirds of American industry was controlled by large, publicly owned corporations, many of them "holding companies." Holding companies hold the ownership of other corporations and may provide some general direction and management. Mergers of smaller companies formed other large corporations. By 1929 these companies controlled vast empires. Two hundred of the largest corporations owned half of U.S. businesses. The influence of small individual owners who closely watched the course of their companies' operations had diminished significantly. As the Great Depression began unfolding, some question arose whether Smith's "invisible hand" still played an effective role in balancing a modern industrial economy. Considerable control of industry was in the hands of only a few. While the administrations of Presidents Harding, Coolidge, and Hoover believed the rules of Adam Smith still applied, industrialists were no longer playing by those rules. Some alleged that such pervasive widespread corporate control proved detrimental to the continued health of the economy as a whole. They lacked vision to look ahead.

For example, Samuel Insull of Chicago created a complex pyramid of public utility holding companies. Insull ended up controlling an eighth of the electrical power in the United States. His collection of companies was worth almost $3 billion. Insull's empire finally went bankrupt in 1932. He could no longer afford to pay interest on stocks and bonds back to investors because of declining income during the Great Depression. With large numbers of holding companies and corporate mergers dotting the U.S. industrial landscape of the 1920s, economist Adam Smith's model of business owners maintaining a competitive balance in markets no longer seemed to be the case. Owners had become increasingly detached from the social situation influenced by their companies.

Business Cycles

Somewhat related to the Adam Smith belief that a business economy will tend to satisfactorily regulate itself was the belief that business will tend to go through "natural" cycles of decline and expansion. Any governmental intervention in these cycles would tend to disrupt the system's natural operations and enhance any problems. The United States had previously experienced a number of economic panics, slumps, and depressions. These came in 1819, 1837, 1857, 1873, 1893, and 1914. Many people, including President Hoover, believed that the events of October 1929, which dramatically worsened by 1931, were merely part of a regular cycle of downturns that had historically beset the nation's free market economy.

National economies are known to fluctuate up and down over time. Levels of employment, industrial and agricultural production, and prices for commodities and produce vary almost continuously. Perceiving economic systems as some sort of "natural" system, many economists in the early twentieth century analyzed economic trends in terms of business cycles, where an almost predictable pattern could be identified and explained. These business cycles were thought to operate on different levels—daily, seasonally, annually, and longer periods of several years. Each long-term cycle was composed of an economic expansion period in which the economy was strong and increased, and an economic contraction period in which the economy would decline.

Many, including President Hoover, argued in the early part of the Depression that what was happening was only the "natural" performance of the economy as it went through its regular business cycle. If left alone, the system would once again improve before long. They argued that these cycles occurred every fifty years or so, with one cycle having occurred from 1792 to 1850 and a second from 1850 to 1896. They claimed that the Depression was simply the natural financial contraction following an economic expansion that lasted from 1896 into the 1920s.

Later in the twentieth century, economists increasingly accepted that such long-term patterns cannot be predicted as if some sort of "natural" cycle. Through the years it became recognized that many forces are at work to influence economic downturns. National economies are subject to such historic events as epidemics, earthquakes, floods, wars, and social strife, as well as climate changes and cultural customs. Therefore, long-term cycles may not always self-regulate, and economic declines may not be so "natural" and have an anticipated automatic improvement. Consequently, business cycles as a cause for the Depression ranks low compared to the other factors considered.

Wealth Distribution

In spite of the general prosperity in America in the 1920s, wealth was not shared equally. Many believe that a wealth distribution tilted so strongly to the rich getting richer was an important factor contributing to the nation's economic instability and ultimately the Great Depression. The unequal distribution of wealth meant workers in general were unable to enjoy higher wages and afford the very goods they were producing.

An unequal distribution of wealth has characterized much of human history. Many people have only a few material goods and a limited ability to change their situation. A few people possess much wealth. This concentration of assets—in land, possessions, or money—gives the wealthy incredible political and economic power. By the 1920s the maldistribution (greatly uneven distribution) of wealth in America was accelerating, and it posed dramatic consequences for the health of the nation's economy. What greatly affected the economy in the 1920s was that the few who were wealthy were growing richer at a rapidly increasing rate. The ability of the superrich to spend their money in ways that would stimulate the economy was quite limited compared to the years following World War II (1939–1945). This increasingly concentrated wealth contributed to one of the most serious problems of the 1920s.

In the years 1919 to 1929, workers increased their output by some 43 percent. In the six years between 1923 and 1929 alone, worker output increased by nearly 32 percent. Worker wages also increased during this period, but only by 8 percent. This rise was much less than the increase in product output. As a result, profits for corporations soared in that six-year period, increasing by 62 percent. Obviously most of these profits went to the rich, not to the workers. What was going wrong in America was that the workers were increasingly less and less able to purchase the manufactured goods they were producing. The country appeared prosperous, but in reality it was headed for a big fall. Unsold inventories of manufactured goods were steadily rising. Even though the wealthy spent money on luxury items, the longer-term problems for the economy were mounting and could not be counteracted by this spending.

The problems were offset for a time by fairly healthy investment by the wealthy in businesses. Many factories acquired new machinery with updated technology. Likewise, thousands of banks, feeling confident about the nation's economic health, hired architects and constructed substantial bank buildings. A sturdy structure with metal doors, marble lobby, brass grills at the tellers' cages, and wood-paneled offices for the officers made a positive public statement. In this way the money was being redistributed to workers through the wages they earned to make the new machinery and construct the bank buildings.

The government did little to address the growing uneven distribution of wealth. In fact, government policies aided the rich in becoming richer. Tax cuts for the wealthy in the 1920s helped them retain even more income. At the same time, when workers tried to organize and work through unions to gain health and wage benefits, the government was hostile to such activities. The government did not support a union's right to strike or enter into collective bargaining agreements to improve the position of workers.

The final undoing of the false prosperity of the 1920s came when workers—the great bulk of them not sharing in the rapid build-up of wealth—deluded themselves into believing that they too were participating in the economic boom. This occurred when people were allowed to borrow money to buy goods. They were also allowed to pay back their loans over longer periods of time. This type of consumption was promoted by new glitzy advertising, and it propelled the nation into a frenzy of personal borrowing and spending. Installment buying provided immediate gratification. For example, a person could buy a radio, a vacuum cleaner, a washing machine, or a car, gain possession of the item, and then pay for it over the following months or years. A problem with this method of consumption was that it obligated a person to pay—including interest—over a long period of time, and sometimes the item wore out before it was paid for. Another problem was that if a person lost employment and had no savings, the lender showed up to repossess the item. This situation, which frequently occurred, contributed to the ill health of the economy. Banks were also loaning out lots of money to people to buy stocks and investments in real estate property. Both were chancy speculations on future trends. These practices placed the banking system in a precarious situation.

Get Rich Quick

The new appeal of mass marketing combined with a booming economy and soaring stock market to create a get-rich-quick mentality that gripped many Americans in the 1920s. This mindset made many people reckless with their money—even those without a great deal to spend. Foolish spending and a change in thinking about savings contributed to instability in the economy. Many Americans in the 1920s grew to believe that it was possible to get rich without working. Others thought that fortune was just around the corner. It was during the 1920s that materialism rose to hew heights in U.S. society. Mass production and mass media were fueling a new mass consumption never witnessed before. Industrialization had transformed society, and it was reflected in the literature of the time. These attitudes fostered reckless investment and speculation. They also were a mirror to changing attitudes about the relationship between work and wealth.

The best-selling book in the United States in 1925 and 1926 was Bruce Barton's The Man Nobody Knows: The Discovery of the Real Jesus. An advertiser by trade, Barton looked at some of the New Testament and wrote a tale for modern American readers loosely based on the life of Jesus. He said that Jesus took a dozen men from the lower ranks of society and welded them into a business organization that changed the world. He used the biblical phrase "Knock and it shall be opened unto you" to try to persuade his readers that Jesus was the greatest salesman who ever lived. Hundreds of thousands of Americans believed him, or at least, they bought or borrowed his book. The popularity of Barton's crass use of Christianity confirmed the materialism of the 1920s.

Another example of the get-rich-quick mentality was found in the essay, "Everybody Ought to be Rich," written by John J. Raskob. Published in the Ladies' Home Journal in 1929, this article proposed the creation of a company whereby small investors might pool their money, invest in stocks, and become wealthy. In a sense Raskob anticipated the creation of mutual funds, an investment in which small investors put their assets into a common fund that purchased stocks. The title of Raskob's essay was indicative of the attitudes of the 1920s.

At a Glance An Anonymous Ditty from the Great Depression

A popular saying in 1929–1930 stated:

Mellon pulled the whistle,
Hoover rang the bell
Wall Street gave the signal
And the country went to hell.

This fascination with wealth and material gain gripped the United States in other ways, such as grand architecture, booming real estate markets, and an increase in the public consumption of luxury goods. The construction of movie palaces—elegant buildings with design themes based on architecture from Spain, ancient Egypt, or China—drew millions of viewers to films which portrayed life in fictional but romantic ways. The tales of movies often celebrated riches and success, while the lives of the players in the films seemed exotic, adventuresome, and wonderful. In many ways Americans were lured further into materialism and financial irresponsibility by the media.

Americans consumed the flood of advertising and enticing images pouring at them. They heard commercials on the radio, flocked to movies telling fictional tales of alluring adventure and romance, read billboards along the roadside, or encountered handsome display ads in magazines and newspapers. They were advised to purchase deodorants to avoid body odor, cleanse their mouths with mouthwash to avoid bad breath, and scour their hair with special soaps to rid their scalps of dandruff. Millions could not resist. Like the glamorous movie stars, they wanted to look good, smell good, and have adventures. The consequences of this get-rich-quick mentality were seen in the wild rise and fall of real estate values in Florida and California.

Florida Real Estate Boom and Bust

For a time in the mid-1920s Florida was the nation's hottest real estate market. A few dollars down might hold a lot (a small parcel of land) until weeks or months later when it could be sold for fantastic profit. The lure in Florida was not only its splendidly appealing weather but also the clever promotion by real estate agents who fed the boom with brochures, signs, and promises. Thousands invested in lots in Coral Cables or other "instant" towns in Florida. Improved transportation and higher wages encouraged people from the North to make more and more trips to the South. Developers wanted to believe that Florida would become a holiday destination and that the entire peninsula would soon be populated with sun-worshipers. This promotion led to the belief that all land in Florida would be valuable, including beaches, bogs, swamps, and scrubland. Promoters in Florida subdivided land and sold it for a 10 percent down payment. Buyers were purchasing property that seemed to have little use, but their intent was not to develop it or to live on it. The reality was that land in Florida was increasing in value daily and could be sold at a profit in a short time. Florida real estate was in the grip of a speculative frenzy.

By 1925 real estate in Florida was so popular that some developers were selling twenty lots on a single acre of land. Lots promoted as being on the seashore were often 10 to 15 miles away from the water. Suburbs also became farther and farther away from towns. Sometimes the farmland or scrubland was equipped with eloquently named streets lined with sidewalks and street lamps. Taxes and assessments amounted to several times the current value of the property. The subdivision of Manhattan Estates claimed to be "not more than three-fourths of a mile from the prosperous and fast-growing city of Nettie." The truth, however, was that the town of Nettie did not even exist.

When some investors actually went to visit the lots they had purchased, they found them to be miles from the seashore or underwater in a swamp. Similar real estate promotions drew investors to Venice or Huntington Beach in southern California. The narrow lots lay blocks and blocks from the much-desired shoreline. The lots were often without nearby streets or utilities. Most proved to be worthless, costing buyers millions.

In 1926 two hurricanes tore through Florida. Hundreds were killed, roofs were torn off of houses, water was everywhere, and yachts were even tossed from the ocean into city streets. The storms caused a lull in the real estate boom in Florida. Property owners were in need of assistance. Peter King, an official of the Seaboard Air Line and a sincere believer in the future of Florida, tried to convince the nation that the "Sunshine State" was not too dramatically harmed. He claimed it was the same old Florida with its nice climate. Investors in the Florida market, however, were not so sure. Loans were not paid, and the land often returned to the original owner.

By 1927 the Florida boom was over. Many had lost their investments. People, however, remained optimistic that other opportunities to make a quick fortune would come along. The stock market was becoming an attractive place to invest, and the possibility of losing money there was not seen as much of a threat.

The Soaring Stock Market

In the late 1920s Americans invested their money in the stock market because it seemed safe and a sure way to make much more. Stocks are certificates of ownership in a company. A stock's value is often linked to the performance of the business or industry. Businesses needed to sell stock in order to raise money to expand their endeavors, and people were willing to purchase these offerings, believing that the business will do well, their stock value will increase, and money can be made. Only 2 percent of Americans were purchasing stock by the mid-1920s. Buying and selling stock shares was largely uncontrolled, as few government regulations existed. The growth in stock values had been so pervasive that many people who bought shares did not realize they could easily lose all of their money. Share prices during the 1920s went up because companies encouraged people to buy on credit. This was called "buying on margin" and enabled speculators to sell shares at a profit before paying what they owed. The result was that the money invested in the stock market was not actually there. For example a person buying on margin purchases a $100 stock for $10 of his own money and borrows the other $90 to complete the purchase. The investor does this in the belief the stock's value will go up. If it doubles you have $110 and pay the $90 back. If it goes down to $50 then the creditor will demand payment of the loan to save himself. During this period of get-rich-quick mentality, the stock market appeared to be a winning solution for many.

Investors were not protected from fraud or hype and often bought misleading stocks. Companies told the public that they were doing well, but the public had no means of confirming whether the companies' financial reports were reliable. It was difficult for investors to know exactly what they were buying. Some Americans began predicting that the stock market was going to crash, but during the 1920s few people really believed them, as the nation seemed so wealthy and powerful.

A great Bull Market gripped Wall Street in 1928 and 1929. Tales began to circulate—and were documented in the financial pages of the newspapers—that a few dollars invested in the right stock today might be worth hundreds of dollars within weeks. Many of the tales were true, even if the stock values were inflated (valued more than their actual worth). So the speculation began to grow. In early 1928 the Dow Jones industrial average was 191; in September 1929 it was 381. The Dow Jones & Company computes Dow Jones stock price averages. Begun in 1897, Dow Jones computes the averages from a set number of selected industrial stocks. The average serves as an indicator reflecting the general trend in prices of stocks and bonds in the United States. The rise from 191 to 381 indicated an overall doubling in the value of stocks during that brief time period. This indicates great profits in buying and selling stocks could be had. The federal government was also playing a part in the frenzied speculation as well. In 1927 the federal banks lowered their interest rates on loans to a low 3.5 percent. This action further enticed many more to speculate in stocks.

At a Glance

  • In 1929 some two hundred corporations owned almost half of American industry. These two hundred corporations, with $81 billion in assets, represented 49 percent of the corporate wealth of the country and 22 percent of the overall national wealth.
  • In the 1920s more than 1,200 corporate mergers eliminated more than six thousand small companies.
  • The Brookings Institution's report, America's Capacity to Consume (1934), reported: (1) the top 0.1 percent of American families in 1929 had a combined income equal to the bottom 42 percent in the country; (2) the 24,000 richest families had annual incomes in 1929 of over more than $100,000, and 513 families earned more than $1,000,000, while 71 percent of all American families (including single adults) had annual incomes under $2,500 and, (3) between 1920 and 1929, persons in the top 1 percent of income gained a 75 percent increase in income.
  • By 1929 three of every five cars and 80 percent of all radios purchased in the United States were bought on an installment plan. The amount of money owed on installment plans in the United States increased from $1.38 billion in 1925 to $3 billion in 1929.
  • In 1929 the average per capita income for all Americans was $750 per year, but for those persons engaged in agriculture it was just $273.

On September 3, 1929, the stock market reached an all-time high in the number of stocks being traded. Trading was occurring at a frantic rate as people were trying to get a share of the action. In the following weeks, however, prices of stocks gradually began to fall. Then, on October 24, more than ten million shares were sold, and prices fell dramatically as sellers tried to get out of the market. Trying to bolster stock market trading, that evening Charles E. Mitchell, chairman of the National City Bank, issued a statement saying that because of the large amount of shares sold, many were now underpriced and would be a good bargain for prospective investors. Alarm over the selling was widespread, however, and there were few buyers. On October 29 over 16 million shares were sold. In less than a month the value of stocks had declined by almost 50 percent; many were now worthless. This plunge of stock and bond values would continue until 1932.

The stock market crash had a tremendous impact on the whole population, not just those who actually owned stock. When investors bought stock, businesses were able to expand production. However when stock prices began to drop, companies were unable to raise the money needed to run their businesses. Within a short time 100,000 American companies were forced to close, and consequently many workers became unemployed. During this era, no federal or state assistance for the unemployed existed. As a result, the purchasing power of Americans fell dramatically. This in turn led to even more unemployment.

Banks also failed. Pressed to meet "margins calls" to pay for stock purchases, investors withdrew their deposits. Like the public in general, however, many banks themselves had invested the customers' deposits they were holding into the stock market. Many banks lacked sufficient cash reserves to meet creditor withdrawals. As confidence in the U.S. banking system waned, depositors would sometimes spark a "run" on a bank, depleting all its cash on hand. In their panic, they often caused the bank's failure.

The mere rumor that a bank was in trouble could cause a run. Because no bank kept enough money on hand to meet all depositors demands at once, those first in line got their money, and those last in line did not. Usually the run caused the bank to face closure, as it immediately depleted all its on hand funds.

Speculators launched new companies and promoted sales of stock in what were sometimes called "Ponzi schemes." These were fraudulent investment plans where the initial investors fed off the cash of later investors. Usually in a Ponzi scheme the company had few assets and little potential to make money for people other than those who created it and got out of the investment in time. Eventually the schemes would collapse. This was a "buying on margin" scheme where investors bought stock using borrowed money for the prospect of getting rich. This posed a great financial risk, and a number of such investors lost everything.

When the federal government stepped in, it often did so too late. In the waning months of 1931, for example, the number of banks failing was increasing. Nearly 15 percent of the nation's banks went out of business between 1929 and 1931. With a banking crisis looming, the Hoover administration joined bankers and insurance company executives to raise $500 million for the National Credit Association (NCA). The organization was to assist banks beset by depositors wanting to withdraw funds. The NCA, however, took little action. By the end of 1931, it had loaned only 2 percent of its funds to troubled banks.

Agricultural Decline

Did a struggling agricultural economy of the 1920s also contribute to the Great Depression? Some thought so and found the seeds of trouble in the lowered prices for farm commodities following World War I (1914–1918). The prosperity of American agriculture, which employed fully one-quarter of workers in the United States in the 1920s, relied on market conditions overseas.

During World War I, the demand for agricultural products grew dramatically. Disruptions in production due to the war in Europe left millions of people hungry. Wheat, corn, dried fruit, meat, and other commodities produced in the United States found strong markets in Europe. For example, U.S. farmers produced less than 690,000 bushels of wheat prior to World War I, but were producing over 945,000 bushels by war's end. At the conclusion of the war, however, several changes were occurring. A number of European countries resumed production and filled the need of their citizens with locally produced commodities. Other nations, beset with economic problems, were unable to resume purchasing foodstuffs from the United States.

International competition was another reality by the 1920s. Argentina, South Africa, and other nations sold meat and cereal crops on the world market and competed strongly with American producers. Still, U.S. agricultural production remained relatively high. Farmers were still producing over 800,000 bushels of wheat a year in 1930. Farmers were growing more than they could sell.

As a result, U.S. crop surpluses grew as farmers kept up the World War I production pace, and prices fell. The downward spiral in the American agricultural economy continued through the 1920s and reached near crisis level in 1929. By then wealthy U.S. investors had cut off loans to other nations, further reducing their ability to purchase farm products from the United States. U.S. investors were busy investing at home in the stock market and American businesses. In addition, due to high tariffs, Americans were not buying foreign-made goods, so no money was flowing to Europe that they in turn needed to buy American food. As a result, the world market was oversupplied with food, foreign nations were less able to purchase U.S. produce, and the American farmers were caught in the middle. For many farmers the Great Depression started immediately after World War I and just got worse after 1929.

The Hoover administration attempted to help out. In 1929 the Agricultural Marketing Act created a Federal Farm Board. The board was designed to assist locally established farm cooperatives, private organizations through which farmers could work together in solving agricultural problems. Congress gave the board $500 million to support the cooperatives. Basically, these federal efforts were to try to establish stability in farm produce marketing. The assumption by Hoover and his advisers that the financial difficulties in agriculture were primarily marketing problems, however, proved mistaken. With the declining agricultural economy, farm foreclosures were leaving banks with a large amount of property they could not readily sell. Between 1926 and 1928, almost 1,600 banks failed and closed their doors.

Thus, the falling demand for U.S. agricultural products after World War I, overproduction by U.S. farmers, the drop in grain prices, and the government's belief that difficulties stemmed mainly from marketing problems collectively contributed to the deteriorating situation in American agriculture. With agriculture being a highly significant part of the nation's economy, this was one likely cause of the Great Depression. The factors were complex and not well understood at the time. Even decades later debate continued about which parts of the agricultural problems were the most important in contributing to the downward spiral of the economy into the early 1930s.

International Conditions

The condition of the international economy was another factor contributing to the onset of the Great Depression. The 1920s were a time of weakness and instability as once-strong European nations struggled to rebuild from the destruction of World War I. For example, Germany was once a powerful industrial and economic force. Following defeat in World War I, however, it was partially occupied by victorious forces and assessed stiff monetary penalties by other nations, including Great Britain. As a result, Germany suffered pronounced economic instability. Also, Great Britain, though victorious in war, had slipped as a stabilizing force in Europe by the 1920s, in part due to the economic drain of the war. Many looked to the United States to play a stabilizing role in helping construct a post-World War I economic order. The United States, however, turned inward, wanting to focus on its own affairs. Stung by the horrors of war, the nation largely shied away from the responsibility of greater international involvement. The turning inward and away from cooperation and interaction with other nations became known as isolationism.

The United States isolated itself, even though it came out of World War I as a creditor nation with a tremendous industrial capability. Creditor nation means the United States had loaned money to other nations to fight the war and to rebuild war-damaged infrastructures (roads, bridges, buildings, etc.). These nations now owed money back to the United States. U.S. private investors continued loaning money to European organizations, helping to stabilize the European economies while making money. By 1928, however, U.S. investors, who were commonly the wealthiest Americans, found that the U.S. stock market was more lucrative an investment than making interest off foreign loans.

Another key factor in international finance during this period was the matter of tariff protections. Tariffs are taxes placed on goods imported from foreign nations. Tariff protections mean that the taxes are raised sufficiently high to discourage people from buying foreign goods, purchasing goods made by U.S. manufacturers instead. The United States wanted to be the world's banker, food producer, and manufacturer while buying as few foreign goods as possible. Supporting this desire, President Hoover promoted U.S. exports to foreign countries while encouraging high tariffs (taxes) on imports. Raising tariffs, however, had another result. Because Americans bought fewer imported goods due to the high tariffs, so little money flowed to European countries they could not buy American exports, nor could they pay their war debts back to the United States. In addition, in retribution foreign nations would raise tariffs in their countries on U.S. goods. This would further discourage purchase of U.S. goods. Many believed these tariffs were bad policy, hurting other nations, and, in turn, hurting the Americans who supported them.

This self-centered national business perspective only served to limit markets for U.S. goods. If domestic markets should slump, which they did in late 1929, American businesses would be obliged to fall back on foreign markets to make up the sale in goods. In addition, the decline in foreign sales only further caused inventories of unsold American goods to grow and prices to decline further, creating company losses. In fact, after the Depression had begun to set in, the U.S. response was only to raise tariffs yet again with the 1930 Hawley-Smoot Act. Many believed this move only plunged the U.S. economy into deeper depression by even further limiting potential markets for U.S. goods.

End of the Road

The apparent prosperity of the 1920s was real but proved to be very limited in term. Clearly, many things were not well in the nation's economy. Danger signs, largely unread, appeared with the decline in purchasing power, rising unemployment, a stagnant real estate market, growing inventories of manufactured goods, and the lack of financial regulations. The national economy was no longer stable. Although many politicians and investors remained hopeful that prosperity was once again just around the corner, the stock market crash confirmed the harsh realities of the American economy. Taking a "wait and see" attitude, the Republican administrations of the 1920s contributed to these causes of the Great Depression. The nation lacked adequate safeguards to stop these cascading sequences of events. The federal government, with planning and action, might have intervened and stemmed some of the difficulties. But embracing Adam Smith's theories of government non-involvement in business, the government leaders chose not to act. The stock market's crash of 1929 was a confirmation to the nation that the prosperity of the 1920s was at an end, and marked the nation's slip into the Great Depression of the 1930s.

Contributing Forces

Stock Markets

A stock represents an ownership interest in a business. Stock certificates are documents that show evidence of that ownership. Stocks are also divided into smaller units of ownership called shares. Selling shares of stocks is one common way companies can

Stock Market Performance, 1929, 1932
StockHigh Day Sept. 2, 1929Low Day Nov. 13, 1929Final Low July 8, 1932
Allied Chemical35419845 1/2
American & Foreign Power160 1/8512 1/2
American Telephone & Telegraph302 1/220772 1/8
Auburn Auto497130 1/444 7/8
General Electric3911739 3/8
International Telephone & Telegraph147 1/253 1/23 7/8
Montgomery Ward134 1/249 7/84 3/8
Radio98 1/228 3/43 5/8
U.S. Steel257 5/8151 1/221 1/2

raise capital (money) for expanding and growing. Stock exchanges encourage people to put savings into corporate investments. The ownership interest a person specifically gains by buying stock of a particular company is usually spelled out in the company's charter or bylaws. The interests include certain rights, such as the right to receive dividends (periodic payments from the company's profits), to vote for company officers and on basic company changes, and to gain information on the performance and health of the company. Stocks are different from bonds. Companies sell bonds to rid themselves of debt. Bondholders are paid interest periodically on their invested money and then paid a certain sum of money when the bond's maturity date is reached.

Stocks are frequently sold through stock exchanges. Stock exchanges have a long history, dating back to the Middle Ages of Europe when early traders sold shares in agriculture and other interests. The French stock exchange began in the twelfth century when merchants would gather in front of a particular family's house to trade (buy and sell) stocks. The emergence of great world trading centers in the sixteenth and seventeenth centuries led to the need for banks and insurance companies. At times these institutions had funding shortages and needed to raise money by selling stock. As a result, stock exchanges grew in various countries, including Great Britain and Germany. By the nineteenth century, trading in stocks had become common in all industrialized nations.

The first stock exchange in the United States was established in Philadelphia, Pennsylvania in 1791. The following year 24 merchants and brokers, trading largely under a tree at 68 Wall Street, established a New York stock exchange. Government bonds and stocks of insurance companies and banks were the most commonly sold securities (stocks and bonds). In 1817 the New York brokers formally organized as the New York Stock and Exchange Board, and in 1863 it became the New York Stock Exchange. Other stock exchanges came along during the Civil War (1861–1865), including the American Stock Exchange. As commercial activity in the United States expanded through the nineteenth century, the stock exchanges expanded, providing capital for the rapid industrialization following the Civil War. With an economic downturn in 1837 that led to many investors losing their money, the exchange began demanding that companies disclose their financial condition to be able to sell stocks through the exchange. There were still no government requirements through the 1920s as business activity continued to increase.

The Rise of Corporations

Corporations are companies that have registered at a public office or court to gain official recognition under state law. By registering the corporation becomes a legal entity separate from its owners and managers. It can have a life beyond its original owners. Being considered a "person," corporations can sue and be sued, can purchase property, and make contracts with others. In this way investment through the stock market in corporate stock is encouraged, since stockholders owning a share of the company have limited liability for corporate actions. A stockholder would lose no more than what he had invested. Shares can easily be transferred from one investor to another, in essence changing ownership.

The process of incorporating businesses is relatively recent in history. Not until the mid-nineteenth century did corporations become the primary form of private company ownership. Until then corporations were more commonly semi-public enterprises, often involved in overseas exploration, trade, and settlement. This included the great trading companies in the seventeenth century, such as the East India Company and Hudson's Bay Company, who were granted trading monopolies for certain regions. These organizations operated as a part of the state, but for private profit guided by public charters. The charters established in detail how the enterprise would operate. The American colonies such as Virginia and Pennsylvania were first settled by such corporations as part of business ventures.

In the United States, corporate charters were initially for public service companies constructing bridges, roads, canals, and docks in addition to private banks and insurance companies. By 1811 New York passed a general incorporation law making it easier for private companies, such as manufacturers to become corporations. By the mid-nineteenth century all states had such laws. With the growth of industries requiring more capital than ever, states competed to attract businesses. One way to compete was to make the individual state laws for chartering corporations as routine as possible for the businesses. With freedom of interstate commerce (trade between states) guaranteed, businesses could shop among states for the best deal. One of the first to use these new incorporation laws were railroad companies who needed considerable capital. Steel and coal industries grew with the railroads. Following the Civil War, industries dramatically expanded from 1870 to 1910, and incorporating became much desired. Giant corporations developed, such as Standard Oil Company and United States Steel which became monopolies in their industries. Public concern over the growing powers of some of the giant corporations led to public support for government antitrust actions to preserve competition.

By the 1920s several hundred giant corporations dominated business in the United States. Their influence was immense—socially, politically, and economically. Strong individuals accumulated much wealth and power. They lobbied for laissez faire government policies that left them free to maximize their profit with minimal government oversight.

Agricultural Expansion

Several changes came in the agricultural industry by the 1920s, leading to financial problems. These issues involved overproduction following World War I, the need for greater capital for purchasing newly available farm machinery, a decreased demand for livestock, and the expansion of agricultural areas through government land reclamation projects. During World War I, Herbert Hoover, who served at that time as food administrator, encouraged vast increases in agricultural production. With agriculture in the United States booming in the 1910s and prices soaring, farmers used their new-found profits to purchase machinery to increase production. Steam plows, combines, seed drills, and commercial fertilizer helped them operate farms efficiently and with substantially larger yields. The shift from subsistence farming (where a family largely lived off what it produced) to commercial farming (where a family specialized in one or two crops and used mechanized machinery) had started after the Civil War. The process accelerated and, by the early twentieth century, had become the prevailing pattern in American farming.

The investments to engage in commercial farming were expensive. Many farmers went into debt, borrowing against their land to invest in new devices. Long term, this pattern contributed to a glut of products that had to compete on the world market. The process worked, however, when markets were good, especially during World War I. The United States had the opportunity to fill a production void left by European nations engaged in war. The predicament of farmers in debt became a major crisis when markets vanished or shrank. For instance, after World War I, when European states resumed their production of goods for the world market, international competition got stiffer again.

Like the crops, problems of over-supply also affected livestock raising. Tens of thousands of farmers in the 1910s raised horses and mules. For a time the demands of the military during World War I created a brisk market for these animals. Suddenly, in 1919, after the war was over the United States shifted from the use of draft animals to automobiles and trucks. An estimated 25 million acres of land that had been devoted to the livestock production of horses and mules suddenly had no immediate use. Much of it was converted to cropland, further adding to the oversupply problem. These farmers faced difficult times by 1920.

Another factor that would affect American agriculture in the 1920s was the creation of new agricultural lands. Congress passed the National Reclamation Act of 1902, creating the Reclamation Service. The agency, renamed the Bureau of Reclamation in 1923, mounted major projects to irrigate arid lands in the American West which affected 17 states.

The federal government constructed dams, ditches, siphons, canals, and head gates to distribute water to millions of acres on which farm families settled. These "reclaimed" lands began to produce potatoes, sugar beets, grain, alfalfa, and other commodities needed to compete on a national and international market.

Prohibition and the implementation of the Eighteenth Amendment in 1920 also was a financial setback for some farmers. Prohibition stopped the production of beer, wine, and grain-based liquors throughout the country. Owners of vineyards and hop farms were put out of business overnight or had to make dramatic changes in production. Grain producers who sold to distilleries also lost their markets. The nation's experiment with prohibition came at an economic cost to special sectors of the agricultural economy.


No National Planning

In the late nineteenth century, Herbert Spencer championed laissez faire policies in America. His teaching, lectures, and books proved highly popular, especially with the wealthy, whose positions and prosperity were justified by what Spencer said regarding letting the economy manage itself without outside forces such as the government regulating it. A consequence of the country embracing laissez faire was that in the early twentieth century the federal government did little economic planning. It adhered to a hands-off policy regarding the economy, believing things would work themselves out over time.

Another source of inaction was the political philosophy of President Calvin Coolidge. Coolidge, vice-president under Harding in the early 1920s, succeeded to the presidency upon Harding's death. Coolidge believed in a balanced budget and little action by the government. Thus, for nearly six years, as warning signs accumulated about the growing disease affecting the American economy, the Coolidge administration did nothing.

Herbert Hoover, who followed Coolidge as president, had gained an international reputation as an engineer and businessman, a relief administrator, and as secretary of commerce starting in 1921. Despite a more humanitarian perspective than Coolidge, neither he nor his administration were willing to engage in large-scale government economic planning. Hoover, elected president in 1928, stressed voluntary cooperation between business and government. Neither he nor his associates saw the government in an active, regulatory role.

The positions of the Coolidge, Harding, and Hoover administrations in the 1920s were strongly pro-business. The federal government cut taxes for the wealthy, discouraged the formation and actions of labor unions, and generally embraced a laissez faire attitude toward the economy. The federal government did little planning and avoided intervention in the business affairs of the country.

Public Demand For Goods

The desire to get a share of material possessions increased among Americans after 1900. Millions of immigrants had poured into the country since the Civil War. Many had found jobs and owned land. Advertising and promotion of material goods danced before their eyes, likely contributing to attitudes of get-rich-quick and spend now. Availability of easy money through loans allowed the public to buy the newly available goods, but placed many heavily in debt.

The 1920s in America were good times. Employment was increasing, and companies were continuing to produce at high levels. While wages were not going up, they remained stable. Although many lived in poverty, more and more people experienced a rising standard of living and more comfort than ever before. Businesses were doing well, and people were purchasing cars, real estate, carpet sweepers, radios, and wringer washing machines.

The nation became interested in the radio and the automobile. Companies such as Radio Corporation of America (RCA), Ford, and General Motors grew and prospered. Investors buying stock in American businesses considered the investments almost guaranteed moneymakers. The market did not look weak, and businesses gave financial reports, though sometimes false, to support those beliefs. With no government regulations to protect potential investors, companies could exaggerate claims of financial success and offer false promises of hot new products that might soon be expected on the market. Sometimes companies offering stock only existed on paper and completely falsified their company reports. The public investor had no way to know if what they were reading or hearing from the stockbrokers was true or not. With stocks of many real companies doing very well, how was an investor to know what was a bad investment?

International Perspectives

Foreign nations looked to the United States with envy during the boom years of the 1920s. The impact of World War I on Great Britain, Germany, and the United States set the stage for many of the economic problems of the later 1920s. While U.S. citizens enjoyed a rise in power and influence, the British saw a decline. Following its defeat, Germany found its economy in disarray, and the nation largely dropped from major influence. European perspectives of the United States began to further sour by the late 1920s. With the U.S. farm economy in decline, the United States put tariffs on foreign goods to try to persuade people to buy American goods. Although a seeming international truce in the use of tariffs by one nation on the goods of another had been reached in 1927, Congress passed the Hawley-Smoot Tariff Act in June 1930. This large increase in taxes on foreign goods forced American consumers to buy less from foreign countries. European countries lost much needed income as a result. Foreign countries retaliated by putting high tariffs on American goods, making American exports too expensive for their residents. Because of the tariff war, exports from all countries declined, as did public spending.

To make matters worse in international relations, with the U.S. stock market soaring by 1928, many wealthy U.S. financial leaders were taking their money out of European investments and putting it in Wall Street stocks. As American investment in Europe declined in 1928 and 1929, Europe's economy also declined. Several European nations thus suffered economic instability. The worst situation, however, was in Germany, where runaway inflation ruined the value of the currency, the German mark. Eventually, at one stage in the spiraling economy, postage stamps cost millions of marks. The German mark was virtually worthless, and the nation's economy was on the verge of collapse. The unemployed and disenchanted in Germany responded positively to the patriotism and militarism of Adolf Hitler and the National Socialist (Nazi) Party, a development that would have large impact in the coming years.

The increase of tariffs and withdrawal of investments had clearly shown the United States was unwilling to assist the European nations in need. The Hawley-Smoot Act demonstrated once and for all that the United States preferred to focus internally on its own needs and not the growing international economic problems. Much of Europe was dismayed with the United States' isolating itself rather than assuming a stronger world leadership role. Many in the United States lacked the understanding of the impact of international inaction by the United States. The loss of U.S. goods and money in Europe directly contributed to worsening economic and political problems of that region.


The Crash Arrives

The stock market crash of 1929 ended a decade of prosperity. The crash did not cause the Depression, but rather was evidence of the weakness of the economy. The economic success of the 1920s was unevenly distributed, with great wealth in the hands of only a portion of the country. There were not enough people with money to purchase all of the cars, refrigerators, clothing, and other products pouring out of the newly expanded American factories. Prosperity had been built on an unstable foundation that crumbled in 1929 with the stock market crash. America began to slip into the Great Depression.

Few people anticipated the stock market crash in the fall of 1929. Even fewer believed that it would cause the entire economy to go into a tailspin. By 1932 the average income had plunged to half of what it had been in 1929. At least one out of four Americans who had a successful job in 1929 was now out of work. As people began to lose their jobs and had no money on which to live, they also lost their homes. In 1930 over two hundred thousand evictions occurred in New York City alone. Despair was felt throughout the country as even the middle class watched in horror as savings and dreams disappeared.

Men were no longer the breadwinners, and they struggled to find food for their families. Some had to sell apples on street corners. Other hungry Americans took advantage of soup kitchens. These kitchens were organized by the Salvation Army and by churches to try to bring relief to the hungry and poor. The suicide rate during the Depression was high, and 1932 marked the most devastating year for those who had no hope. In 1932 more than twenty thousand Americans committed suicide; 16,453 of them were men. Women were also confronted with despair and depression in the 1930s. Often they were better able to cope with the problems of the era by fulfilling their expected social roles of keeping busy at home. Women would still cook, clean, and watch over their children while their husbands hopelessly searched for work and food day after day.

Not all women, of course, stayed at home. Though historically facing significant discrimination in the workplace prior to the 1930s, the number of married women in the labor force increased by 52 percent during the Great Depression. By 1940 over four million married women had jobs, representing about 15 percent of all married women in the nation. During the Depression they faced common accusations of taking jobs that could have gone to unemployed men. They were mostly able to hold jobs not normally sought by men at the time, such as in clerical positions, beauty salons, nursing, and dental hygiene. Even where they were able to keep jobs, women still commonly were paid less than men doing the same work.

The stock market crash of 1929 signaled the beginning of the most significant decline in the American economy in the nation's history. Even a decade later Americans suffered from the fallout of this event. The decline of stock values wiped out savings, destroyed public confidence, drove banks and businesses into bankruptcy, caused numerous suicides and mental breakdowns, and shattered delivery of public services.

The stock market crash became a benchmark for measuring future conditions in the stock market. For millions the events of 1929 remained a dark, bitter memory at the beginning of hard times and great suffering due to unemployment. The United States faced another major economic slump in the early 1980s. The jobless rate hit almost 11 percent by the end of 1982, the highest since the Great Depression. Approximately 12 million people were looking for jobs, the most since 1933. Bankruptcies also reached the highest level since 1932, including the closing of many banks and savings and loans. There were two million homeless living in cars and tent cities, reminiscent of the Hoovervilles of the Great Depression. Just as it had earlier, farming income also suffered, and conflicts arose in farming communities when banks tried repossessing farms and equipment from farmers who could no longer make payments on loans. The similarities to the Great Depression for many were very unsettling. Massive government spending by the federal government under President Ronald Reagan (served 1981–1989) on defense helped pull the economy out of the slump.

Remedies of the 1930s

The stock market crash unleashed events that proved exceedingly difficult to turn around. President Hoover tried but failed to respond successfully to its consequences. President Roosevelt's New Deal tried a variety of programs to bring about relief, recovery, and reform. First of all, in response to the thousands of banks that were closing all over the country, in March 1933 President Roosevelt declared a "bank holiday," closing banks to the public for a week. During this time Roosevelt sent auditors to check the solvency (stability) of the individual banks. Those with sufficient assets to survive were permitted to reopen. Those virtually broke remained closed to restore long-term confidence in banks. This emergency measure proved highly successful in preserving the U.S. banking system at a moment of grave danger. The public once again began placing their money in banks with peace of mind. Next, Congress passed the Banking Act of 1933, commonly known as the Glass-Steagall Act. The act created the Federal Deposit Insurance Corporation (FDIC) to protect bank deposits, which were previously not guaranteed in the event of something like a bank run. The result was that the number of bank failures declined sharply and even temporarily came to a halt. With depositors assured that, even if their bank collapsed, the government would insure their deposits, confidence in the banking industry was stabilized, and people began to have more faith in putting their savings into banks.

More About…The Securities and Exchange Commission

The Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC). Working with Congress and other federal agencies, the SEC's primary concern is with enforcing the securities laws and protecting investors who interact with these various organizations. The creation of the SEC ensured that the stock market would not be a free-forall, but rather a more closely monitored and regulated industry than it was in the 1920s. Congress hoped to put faith back into the investor and to guarantee that the market would not experience a crash as severe as the one of 1929.

Because investors have no guarantees that securities (stock and bonds) cannot lose value, the SEC makes sure all investors have access to basic reliable information before making purchases of securities. The SEC requires almost all companies selling stocks publicly to provide financial reports to the public. The SEC also oversees the stock exchanges, brokers, dealers of stocks, and investment advisors. Companies must tell the truth about their business, their stocks, and what risks might be involved.

The SEC is composed of five commissioners, appointed by the U.S. president, who oversee the agency. In order to ensure that the Commission remains non-partisan, no more than three commissioners may belong to the same political party. The first chairman of the SEC, appointed by President Franklin Roosevelt, was Joseph P. Kennedy, father of President John F. Kennedy (served 1961–1963).

The SEC is composed of four divisions. The first is the Division of Corporation Finance. It provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939. This division also recommends regulations to implement these statutes. The second is the Division of Market Regulation, which establishes and maintains standards for fair, orderly, and efficient markets. It does this by regulating the major securities market participants such as brokerage firms. Third is the Division of Investment Management. This division oversees and regulates the investment management industry and administers the securities laws affecting investment companies and investment advisors. Finally, the fourth is the Division of Enforcement, which investigates possible violations of securities laws. With these four divisions, the SEC is able to monitor and regulate the market closely to protect investors from fraud and unstable conditions.

The SEC requires public companies to disclose meaningful information to the public so that investors can judge whether the company's securities are a good investment. Such information, which may be contained in what is known as a stock prospectus, should include all the factors surrounding the offering of the stock, the names of the company's officers and their salaries, names of others who hold 10 percent or more of stock already sold, a detailed description of the business, and the financial condition of the company. Some of this information would be included in company performance reports that are commonly available to the public.

The SEC oversees other key participants in the securities market, including stock exchanges, broker-dealers, investment advisors, mutual funds, and public utility holding companies.

In addition to the changes in banking, the federal government also faced stock market problems. Congress needed to reaffirm the public's faith in the stock market by providing some form of protection to private investors. Ferdinand Pecora, an assistant district attorney of New York, was hired by the Senate to conduct an investigation of stock market activities. A series of hearings took place to identify problems and solutions. The investigation lasted from 1932 into 1934. The resulting report identified numerous problems with stock market trading and led to a public demand for change. The Pecora investigation uncovered widespread fraud and corruption involving the sale of stocks. The fraud included major misrepresentation of what the companies and stocks represented, including the selling of stocks of fictitious companies. Potential returns on the investments were often exaggerated and high-pressure sales techniques were applied. Government regulation of the stock market was needed. On March 29, 1933, President Roosevelt sent a message to Congress demanding that stock brokers and others who sell stock be held accountable for their actions.

As a result, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were designed to help restore investor confidence in the market by providing more structure and government regulation. These laws were based on two ideas. First, companies offering stock on the market had to tell the public the truth about their businesses, the securities they sold, and the risks involved in investing. Second, people who sold and traded securities—brokers, dealers, and exchanges—were to put investors' interest first and treat them fairly and honestly. Violations of the laws could lead to criminal prosecution by the government and civil lawsuits by investors against the companies. In order to monitor the companies and individuals, Congress created the Securities and Exchange Commission (SEC) with the second act. This was the first time that the federal government had become directly involved in the stock market activities, and the confidence of the public in buying stocks was once again restored.

Notable People

Herbert Hoover (1874–1964). Hoover was born in West Branch, Iowa, in 1874. Orphaned at the age of nine, he lived with a variety of relatives in Iowa and spent his teenage years in Newberg and Salem, Oregon. Although his parents belonged to a "progressive" branch of the Quaker religion, his religious training was quite rigorous as his mother was an ordained Quaker minister. In 1895 Hoover graduated with a degree in geology from Stanford University and became a mining engineer. Hoover's career in mining was a success, and by 1895 he had become a millionaire. He supported the branch of progressivism that stressed cooperative economic organization, self-regulation by businesses, and voluntary activity through American society. These beliefs greatly influenced his response to the mounting economic problems that beset the country during his involvement in government. Hoover served as head of the Commission for the Relief in Belgium, as President Woodrow Wilson's U.S. food administrator (served 1917–1919), and as director general of the American Relief Administration in Europe. He became such a popular philanthropist that both the Republican and Democratic parties wanted him to be their presidential nominee in 1920. Hoover did not wish to run for president and instead served as secretary of commerce for Presidents Harding and Coolidge. In 1928 Hoover ran for the presidency and was elected under the Republican ticket.

Andrew William Mellon (1855–1937). Andrew Mellon was born in Pittsburgh, Pennsylvania. In 1886 Mellon, along with his brother Richard, took over his father's banking firm. As his experience in the banking industry grew, Mellon later established other banks. He also expanded his holdings in key American industries such as oil, locomotives, coal, hydroelectricity, bridge building, public utilities, steel, and insurance. Mellon played an important role in the founding of the Aluminum Co. of America. In 1921 Mellon resigned his position as president of the Mellon National Bank to become U.S. secretary of the treasury, serving until 1931. From 1931 to 1932, he served as ambassador to Great Britain.

In his position as treasury secretary Mellon favored high tariffs, reduction of the national debt, low personal and corporate taxes, low excise taxes, and government assistance to agriculture through the purchase and sale of commodities abroad. An active art collector, Mellon helped create the National Gallery of Art in Washington, DC, to which he donated 369 paintings and portraits, as well as monetary contributions.

John Jakob Raskob (1879–1950). Raskob, an American financier, was born in Lockport, New York, in 1879. An attorney, he moved to Ohio and became involved in industry. In 1902 he settled in Wilmington, Delaware, to run E. I. du Pont de Nemours and Company, a manufacturer of dynamite, gunpowder, and chemicals. Following World War I, Raskob invested in General Motors to help build the automotive company and its financial subsidiary, General Motors Acceptance Corporation.

A multimillionaire by the 1920s, by 1934 Raskob became an outspoken critic of President Roosevelt's New Deal. Raskob and other U.S. business leaders considered Roosevelt and his New Dealers an increasing threat to the U.S. capitalist system. Government was becoming too intrusive in private economic matters in their mind. Thoughts of New Dealers regulating the stock market and other economic reform proposals such as the Agricultural Adjustment Act, which attempted to control agricultural production, prompted Raskob to take action. Raskob's views were summed up in the article "Everybody Ought to be Rich," for The Ladies Home Journal. Though Raskob had earlier helped build the Democratic Party, his increasing dislike for Roosevelt led him, along with the Du Ponts, to found the American Liberty League in 1934. At that time the League became the leading voice from the right in opposition to the New Deal. They sought to shove the Democratic Party in a more conservative direction with less business regulation and lower taxes for the wealthy. It soon became apparent to much of the public that the League existed primarily to represent the self-interests of the rich who had founded it. Therefore its following was small and short lived.

Adam Smith (1723–1790). Smith is a major figure in the history of economic thinking and greatly influenced U.S. economic policies up through the 1920s. Smith was born in 1723 in a prosperous Scottish fishing village near Edinburgh to a well-to-do family. At age 14 he entered the university at Glasgow, at the time a major intellectual center. Graduating in three years, Smith then continued his education at Oxford. At the age of 27, in 1751 Smith became a professor at Glasgow. There Smith mixed with a wide circle of aristocrats, government leaders, world merchants, and intellectual figures, including the highly regarded philosopher David Hume. Hume became a longtime friend of Smith's. Possessing a keen interest in trade and business, Smith published his first work on the principles of human nature in 1759.

In 1763, while living in France, Smith was hired as a personal tutor for the family of British leader Charles Townshend. There Smith worked on the epic book The Wealth of Nations that was published in 1776. The book is recognized as the first great work on political economy and the rise of orderly societies. In it Smith explored the "laws" regulating the distribution of wealth in a society. The work represented the prevailing thoughts during the Enlightenment of Europe, an age in which major breakthroughs in science and philosophy were occurring. The inevitable progress of human societies was a prevalent theme. The Wealth of Nations greatly influenced the tendency toward laissez faire government policies of the various Republican administrations through the 1920s.

More About…The Holding Company

The phenomenon of large corporate holding companies probably attracted relatively little awareness from the average American during the 1920s. Few realized the growing concentration of economic power in the country. Holding companies would operate in the following manner: A group of businessmen would form a company and sell its stocks on the lively stock market of the 1920s. With the money gained from the stock sales, they would then use the money to buy enough stocks from other existing companies to gain control of them. When the businessmen wanted to make even more money, they would create a second holding company and sell stocks. The immediate companies established by the businessmen were not actually producing any commodities, only the corporations they had purchased were producing goods or services. It was all a money game on paper, creating a complex web of companies designed to earn money for the businessmen. With the money gained from the sale of stock from the second holding company, the businessmen would buy all of the stock of the first holding company, which had no actual value beyond the businessmen's purpose of generating money to buy the stock of legitimate companies. This process could go on indefinitely as the businessmen would then establish a third and fourth holding company, each time making more money off of the stock investments and gaining increasing control over a growing number of corporations. Because of the complex relationships among holding companies, it was difficult to determine at any one time just how many existed.

Following the crash of the stock market, the public no longer had money to buy such stocks. In addition, the corporations bought by the businessmen running the holding companies were making less money as fewer goods were being sold. The holding companies were no longer bringing in money to pay the interest on investments that had been made earlier. Often, trying to pay interest to investors, they would have to take away earnings from the lower corporations. As a result, fewer goods were being produced, unemployment increased, and the nation's general economy further declined. Recognized as a contributor to the Great Depression, Congress eventually outlawed the giant holding companies.

Primary Sources

October 24, 1929

Elliott V. Bell was a reporter for the New York Times when the stock market crashed in 1929. He recounts that day—with its sweeping highs and lows—in David Colbert's Eyewitness to America (1998, pp. 424–428).

October 24, 1929, … was the most terrifying and unreal day I have ever seen on the Street.… The market opened steady with prices little changed from the previous day, … then around eleven o'clock the deluge broke.

It came with a speed and a ferocity that left men dazed. The bottom simply fell out of the market.… Thousands of traders, little and big, had gone "overboard" in that incredible hour between eleven and twelve. Confidence in the financial and political leaders of the country, faith in the "soundness" of economic conditions had received a shattering blow. The panic was on.

After the meeting [of bankers], Mr. Lamont walked across Broad Street to the Stock Exchange to meet with the governors of the Exchange.… He said: "Gentlemen, there is no man nor group of men who can buy all the stocks that the American public can sell.".…

The streets were crammed with a mixed crowd—agonized little speculators, walking aimlessly outdoors because they feared to face the ticker and the margin clerk; sold-out traders, morbidly impelled to visit the scene of their ruin; inquisitive individuals and tourists, seeking by gazing at the exteriors of the Exchange and the big banks to get a closer view of the national catastrophe; runners, frantically pushing their way through the throng of idle and curious in their effort to make deliveries of the unprecedented volume of securities which was being traded on the floor of the Exchange.…

I remember dropping in to see a vice-president of one of the larger banks. He was walking back and forth in his office. "Well, Elliott," he said, "I thought I was a millionaire a few days ago. Now I find I'm looking through the wrong end of the telescope."

Suggested Research Topics

  • Review newspapers for the days October 24–31, 1929, and assess the extent to which reporters grasped the seriousness of the crash of the stock market.
  • Examine the actions of Andrew Mellon as secretary of the treasury in the 1920s and identify what steps he took to try to keep the United States prosperous.
  • Investigate the real estate boom in Florida or southern California in the 1920s, and assess the lack of realism displayed by investors in buying properties in these states.



Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998.

Glasner, David, ed. Business Cycles and Depressions: An Encyclopedia. New York: Garland Publishing, Inc., 1997.

Leuchtenberg, William E. The Perils of Prosperity. Chicago, IL: University of Chicago Press, 1993.

McElvaine, Robert S. The Great Depression: America, 1929–1941. New York: Times Books, 1993.

Myers, William Starr and Walter Newton, eds. The Hoover Administration: A Documented Narrative. New York: Charles Scribner's Sons, 1936.

Parrish, Michael E. Anxious Decades: America in Prosperity and Depression, 1920–1941. New York: W.W. Norton, 1992.

Further Reading

Allen, Frederick Lewis. Only Yesterday: An Informal History of the 1920's. New York: Harper & Brothers, 1931.

Barton, Bruce. The Man Nobody Knows: A Discovery of the Real Jesus. Indianapolis: Bobbs-Merrill Company, 1925.

Chandler, Lester V. America's Greatest Depression, 1929–1941. New York: Harper & Row, 1970.

Galbraith, John Kenneth. The Great Crash, 1929. Boston: Houghton Miffin Company, 1954.

Green, Harvey. The Uncertainty of Everyday Life 1915–1945. New York: Harper Collins, 1992.

Jacobson, Matthew. The Money Lords: The Great Finance Capitalists, 1925–1950. New York: Weybright & Talley, 1972.

Parrish, Michael. Anxious Decades: America in Prosperity and Depression, 1920–1941. New York: W. W. Norton, 1992.

Phillips, Cabell. From the Crash to the Blitz, 1929–1939. New York: MacMillan, 1969.

Terkel, Studs. Hard Times: An Oral History of the Great Depression. New York: Pantheon Books, 1986.

See Also

Banking ; Employment ; Farm Relief ; Global Impacts ; Interwar Era ; Labor and Industry ; New Deal (First, and Its Critics) ; Reconstruction Finance Corporation