The 1930s Business and the Economy: Topics in the News

THE SLOW CREEP OF THE DEPRESSION

On October 24 and October 29 in 1929, around nine billion dollars were wiped off the New York Stock Exchange. The "Great Crash" put an end to the "roaring twenties" and began the financial slump that was known as the Great Depression. There had been other slumps in the past, but the effects had always been limited to particular industries or regions. This time the entire nation suffered. The new national media was partly to blame. By reporting events from around the country, the media made the slump seem worse than it really was in the early stages. People lost confidence in the economy, and it began to spiral out of control.

Unlike the crash, the Depression came on slowly. Politicians and business leaders claimed it would be no more than part of the normal business cycle. President Herbert Hoover (1874–1964) led the optimists, claiming in May 1930 that the worst was over. But to most people it was obvious that the situation was getting worse, even after the crash stock prices kept falling. General Motors (GM) stock fell from $212 per share in 1928 to just $8 in 1931. In 1932, American industry produced only half what it had made in 1929. Wages kept falling, with unskilled workers being paid only seven cents an hour. By 1932, most politicians and business leaders had given up on the idea that the economy would improve quickly or easily.

There were several reasons why the Great Depression was so severe. Some areas of the economy had been struggling since the 1920s. Farming was especially weak. By 1920, for the first time ever, more Americans lived in towns and cities than on farms. They made more money in factories than on farms. At the time, American farmers earned only 40 percent of the average wage for laborers in the cities. When the Depression hit, hundreds of thousands more gave up their land and moved to urban centers. Drought made the misery worse. In the West and Plains states, farmland dried up and literally blew away. Dust storms buried small buildings, and livestock starved. Whole communities of people packed up whatever they could carry with them and set off in search of work.

During the 1920s, American farmers had borrowed money and modernized their farms. They bought machinery, land, and used fertilizers to get as much from the soil as possible. Bumper crops around the world in the late 1920s made prices drop; with more food available, the prices growers could charge for their crops went down. Farmers entered the 1930s heavily in debt. By 1932, they were selling their crops for less than half what they were worth in 1929. In 1930, the Hoover administration had implemented the Smoot-Hawley Tariff, a high tax designed to protect American farmers by reducing the quantity of imported goods, including food, coming into the country. It did not work as planned, however, and the economy continued to lose momentum. The troubled banks began to call in their loans, and many farmers were forced out of business.

Other industries suffered as well. In mining, wages fell around 12 percent in the 1920s. This meant that millions of Americans could not afford to buy the electrical and other goods that were coming on the market. As a result, there was an overproduction of consumer goods, oil, and food. These products had to be sold at a loss. The banks loaned money to people who wanted to buy cars and consumer goods. This hid the fact that consumers didn't have the money to pay for them. Once investors realized this was happening and stopped supporting such bad loans, the economy began to crumble.

Unemployment and the Changing Workforce

Between 1930 and 1940, the number of working women rose from 10.7 million to 12.8 million. At the same time the total labor force grew from 48.8 million to 52.7 million. By 1940, women accounted for 24.3 percent of American workers.

Source: U.S. Department of Labor.

Many attempts to fix the economy during the early 1930s in fact made it worse. Business leaders advised "belt-tightening" and cutbacks in spending. But since the problem was that nobody was spending money, spending even less money could not help. Some businesses attempted to ride out the storm by working together. But President Hoover stepped up antitrust prosecutions against those who tried to control the market in this way. It was a policy that made the problem of oversupply worse. With companies competing instead of cooperating, the market was flooded with consumer goods and oil, and prices fell. Hoover also refused to pay farmers to produce less and avoided trade agreements that might have eased the problems of American industry. The election of Franklin D. Roosevelt (1882–1945) in 1932 marked the start of a more flexible, imaginative approach to solving the Depression. While his New Deal had many faults, its effect was to rescue the American economy from the worst downturn in history.

A NEW PRESIDENT AND A NEW DEAL

Until October 24, 1929, the American economy was run by business for business. The free market was allowed to govern prices and production levels. Herbert Hoover (1874–1964), who served as secretary of commerce between 1921 and 1928, called it the "American System." The crash of 1929, in the first year of Hoover's presidency, exposed the weaknesses of the system. Yet even after the crash, Hoover insisted that the market would right itself. He stuck to his conservative view that business could save itself, and he tried to persuade business leaders to hold their nerve. Hoover's "hands off" approach failed. Unemployment rose, factories closed, there were strikes, violent protests, and homelessness. The American System had to change.

"Hoovered"

When President Herbert Hoover (1874–1964) failed to save the country from the Depression, he became the target of bitter jokes. They included a series of "Hooverisms":

"Hooverville" was the name given to shanty towns where the homeless and many of the unemployed lived. During the Depression every major city had its Hooverville.

When gasoline became too expensive, many people began towing their automobiles with horses. Cars towed this way became known as "Hoovercarts."

One of the enduring images of the Depression is the beggar with his empty pants pockets turned out to show he has nothing. The turned out pants pockets became known as "Hooverflags."

Where Hoover had stuck to the system and failed, President Franklin D. Roosevelt (1882–1945), who swept to victory in the 1932 election, was

more flexible. He talked to economists and business leaders about different ways of solving the Depression. At the center of his so-called "Brains Trust" were three professors from Columbia University. Raymond Moley, Rexford Guy Tugwell, and Adolf A. Berle were assisted by a number of other experts from business, industry, law, and politics. These experts devised a plan to support and control business. This plan for the American economy was called the New Deal.

Although many companies feared the New Deal, objecting to a regulated, organized form of capitalism, a number of powerful corporations supported it. These corporations included banks such as Goldman Sachs and the Bank of America, as well as IBM, American Tobacco, and Coca Cola. Their support of this dramatic plan to change America really did change the nation. While the Republican Party had, to this point, enjoyed years of business support, these corporations instead became important donors to the Democratic Party well into the 1960s. In addition, many of these banks and corporations were led by ethnic Americans. So not only did the New Deal revolutionize American capitalism, it also gave ethnic Americans a voice at the highest levels of government.

Roosevelt tried to solve the Depression by breaking it down into a series of smaller problems. This sometimes meant his administration was accused of not knowing what it was doing. But it meant the New Deal could be flexible and realistic. One example is the National Recovery Administration (NRA), whose first head was Hugh S. Johnson (1882–1942). The NRA allowed businesses to work together to control markets, rather than competing against one another. Working together in "cartels" meant that companies did not produce too much. This in turn kept prices up and profits healthy. Other agencies set up government-run industries to control the market and regulate supply and prices. The main problem with this system was that smaller companies couldn't compete. On May 27, 1935, the Supreme Court ruled the NRA unconstitutional.

A key idea behind the New Deal was that if people were paid more they would spend more on goods and services. Title 7(a) of the National Industrial Recovery Act (NIRA), passed in June 1933, allowed labor unions to work with employers to get the best wage deals for their members. This was known as collective bargaining. Social security and unemployment compensation helped the growing number of homeless people. The taxation system was changed so that those who earned the most paid the most. The dollar was deliberately devalued on the world money markets to make exports more competitive. With the Agricultural Adjustment Act of 1933, farmers were even paid to leave land unplanted and to raise fewer animals; it also guaranteed farmers a minimum price for their goods, providing a system of farm price support that continues in altered form into the twenty-first century. The average American was much better off under Roosevelt's reforms.

By 1937, the American economy was doing well. Unemployment had been reduced by 50 percent in five years to 7.7 million. Business investment stood at $11 billion, almost ten times what it was in 1933. On the down side, government debt had risen dramatically. Even so, the New Dealers were convinced that their plan had worked and began trying to balance the budget. They cut back on government work programs and reduced spending elsewhere. Almost immediately, the economy collapsed again.

Despite the troubles, Roosevelt was able to put the New Deal back on course. Although stability had not quite returned by the time World War II began, the $240 billion spent on the war effort turned out to be just what the American economy needed. And the economy had fully recovered by the late 1940s.

Agriculture Statistics

Between 1930 and 1940 the number of farm workers fell from 10.3 million to 8.9 million. In the same period the total national income from farming fell from 12.6 million dollars to just over nine million dollars. In 1909, farmers had to grow two bushels of wheat to be able to buy a pair of shoes. By 1933, that number had risen to nine bushels.

WORKING IN AMERICA

For the American worker, the 1930s turned out to be the most troubled decade of the century. As more workers joined unions, they were better able to protest about unfair treatment by employers. Many found that the only way to make themselves heard was to walk off the job, but this carried considerable risk since unions had no official power to protect their members. In Harlan County, Kentucky, miners lived in company towns where all the buildings, shops, and even the churches were built and owned by the mine operators. Going on strike meant losing your home, your friends, and your family. Living conditions were terrible. Between 1929 and 1931, 231 children died of malnutrition in Harlan County. Then in 1931, the mine operators cut wages by 10 percent. The United Mine Workers (UMW) began to gather support, and by March 1931 the workers and the companies were in open conflict. At Evarts (one of the three noncompany towns in Harlan County where most of the union workers had moved), strikers and company deputies exchanged gunfire, and there were several deaths. After two days of chaos, the National Guard managed to restore order. Workers who refused to give up their union membership were forced to leave. The rest had no choice but to go back to work and accept the company's conditions. What occurred in Harlan County was one of the worst incidents of its kind, but it was not unique.

In the 1930s the automakers and their workers clashed. Company henchmen beat up workers and used teargas and live ammunition to control strikers and protesters. Many people were injured and some were killed. Between January 1934 and July 1936, General Motors spent almost $1 million on private detectives and security guards to spy on its workers. At Ford, under chief Harry Bennett, the "service department" spied on and intimidated workers at Michigan's River Rouge plant. The autoworkers' and miners' experiences illustrate the realities faced by the more than 1,500,000 workers who went on strike in 1934 alone.

By mid-decade unions had managed to win legal safeguards for themselves and the workers they represented. Rising unemployment and falling wages persuaded American workers to join unions in huge numbers to fight against poor working conditions. In its attempt to force companies to help restart the economy, the Roosevelt administration actually encouraged workers to form unions to negotiate with employers. In 1935, John L. Lewis (1880–1969) founded the Committee for Industrial Organizations (CIO), later known as the Congress of Industrial Organizations, as a breakaway from the American Federation of Labor (AFL). Unskilled, blue-collar workers were among the most at risk in the Depression. And the AFL had objected to Lewis's idea of bringing unskilled workers into the labor union movement. It was because of the CIO that most of American industry was unionized by 1939.

In 1935, the CIO was boosted by the Wagner Act, which protected unionized workers from unfair treatment. In return, Lewis campaigned for Roosevelt's reelection in 1936. He spoke at campaign rallies and encouraged workers to vote Democrat. Lewis would later claim that every steel town was behind Roosevelt as a result of his campaign. Although the CIO lost much of its influence when the economy slumped again in 1937, ultimately it was the CIO, not the AFL, which improved conditions for blue-collar workers and persuaded the automobile and steel industries to accept unions.

Another important piece of legislation eased the plight of workers. The National Labor Relations Act (NLRA), which made it illegal for companies to break up unions, was passed by the Roosevelt administration in 1935. The United Automobile Workers (UAW) was formed soon after. Even so, on May 26, 1937, union leaders Dick Frankensteen (1907–1977) and Walter Reuther (1907–1970) were beaten up on an overpass near the main gate at River Rouge. Ford's hired thugs also beat up photographers and a group of women who happened to be there. But by 1937, the workers were winning in their struggle for fair treatment and pay.

Although organized union strikes did get results in some cases, walkout strikes did pose an obvious drawback: once outside the factory gates, strikers

might never be allowed back in. Unions quickly devised an alternative: the sit-down strike. The sit-down strike, where workers literally sat down on the job and refused to leave, was one of the most effective forms of protest in the 1930s. In 1936, the Bureau of Labor recorded forty-eight sit-downs, involving 88,000 workers. In 1937, there were 477 sit-downs, with 400,000 workers taking part. A sit-down strike at General Motors' Fisher auto body plant began on December 31, 1936, and lasted forty-four days. General Motors went to the courts to have its workers evicted, but the February 3 deadline came and went. Eventually, with Roosevelt himself encouraging talks, the protest ended on February 11, 1937. General Motors officially recognized the United Automobile Workers soon after, and before long many other large companies had accepted labor unions as part of pay bargaining talks.

THE CHANGING AUTOMOBILE INDUSTRY

The automobile industry hardly existed as the twentieth century began. Yet by 1930 it had become the most important sector in the American economy. In 1929 a record five million vehicles were sold, and Americans spent one-tenth of their income buying and looking after their cars. When the economy collapsed, the auto industry was hit hard. By 1932, sales had dropped to just 1.33 million cars. Between 1929 and 1932, Ford Motor Company alone let over 80,000 of its workers go.

Ford, General Motors (GM), and Chrysler became known as the "Big Three" as their power in the car market increased. But although they gained market share in the 1930s, they didn't have an easy time. Ford soon lost its place as America's biggest carmaker as both GM and Chrysler made improvements to their models. In 1931, Chrysler's Plymouth and GM's Chevrolet were cheaper, better made, and more fuel-efficient than Ford's workmanlike Model A. Under the leadership of Alfred P. Sloan (1875–1966), GM's cars

were stylish and in tune with the age. Walter P. Chrysler (1875–1940) was also a brilliant and inspiring business leader. Henry Ford (1863–1947), in contrast, was old-fashioned and unwilling to accept change. By 1931, GM sold more than 43 percent of the cars in the United States to Ford's 28 percent. Two years later, Ford had fallen behind Chrysler into third place.

As the Depression deepened, the power of the Big Three increased. Independent automakers, such as Pierce-Arrow, Stutz, Marmon, Duesenberg, and Hupmobile, went out of business. (Independents sold onequarter of all the cars on the road in 1925.) Of the luxury manufacturers, only Packard survived as an independent. It did so by building the smaller "junior" Packard in order to hang on to a shrinking market. By 1933, 95 percent of the market belonged to the Big Three.

BANKING SYSTEM FAILURE

In the early twentieth century, Americans were split in their view of the banks. During the boom of the 1920s, many Americans saw bankers as careful, no-nonsense, trustworthy individuals. Yet among religious groups and in rural communities, investing and borrowing were often seen as a form of gambling. By the late 1920s, bankers such as J. P. Morgan (1867–1943) had great wealth, power, and influence, but government investigations in the 1930s showed the banks to have abused their powerful positions. For example, multimillionaire Morgan somehow managed to avoid paying tax between 1930 and 1931. By 1933 it seemed that nobody would trust the banks ever again.

During the 1920s, the banks loaned out far more money than they could possibly afford. This meant that when the stock market collapsed, banks had no assets to tide them over. When this began to happen, people rushed to take their savings out of the banks. Unfortunately, there was rarely enough cash available in any individual bank. Banks turned customers away, and many had to go out of business. In 1931 alone, 2,294 banks closed their doors permanently, taking their customers' money with them. In many cases people lost all the money they were saving for their retirement. Of course, the more times this happened, the more people panicked, and the more banks went under. By 1932, more than $9 million in savings had been wiped out.

By March 1933, the whole banking system of the United States was near collapse. On the night of his inauguration, President Roosevelt missed the celebration dinner to meet with bankers and government aides. Discussions went on over the weekend, and by Monday, March 6, a nationwide bank holiday was announced. By closing the banks for the next eight days, Roosevelt managed to calm the public mood. Public confidence

was also boosted by the Pecora investigation into banking fraud. In order to reduce the risk to individual depositors, legislation in 1933 forced banks to separate personal banking from investment banking. By 1935, the Federal Reserve in Washington, D.C., had control of the activities of the banks and their wealthy owners. It was clear that the banks would never again be free to do as they pleased.

HITTING THE GUSHER

Until 1930 the hills of East Texas were never considered to contain oil reserves. A geologist from the oil company Texaco promised oil wildcatter Columbus "Dad" Joiner that he would drink any oil found there. Later that year Joiner detected oil. Within weeks a small shantytown had grown up around his claim. In October 1930, he struck a huge reservoir. As the sound of the rising oil grew louder, a crowd gathered to watch the "gusher." One oilman was so excited that he started firing his pistol and had to be fought to the ground. The reservoir was estimated to cover 140,000 acres. As far as anyone knows, the Texaco geologist was not forced to keep his promise.

In addition to this reservoir, there were many important oil strikes in Texas, Oklahoma, California, and overseas in the Middle East. On May 31, 1932, Standard Oil of California opened a field in the small Middle Eastern island nation of Bahrain that would produce 20,000 barrels a day by 1936. The result was a glut of oil on the market. Every independent company and "wildcat" operation tried to get as much oil out of the ground as it could, causing a collapse in prices. In 1926, crude oil cost $1.85 per barrel in Texas. By 1931, it fetched between two and six cents. That was almost eighty cents less than it cost to bring it to the surface.

Antitrust laws, preventing companies from agreeing on a market price between themselves, made price fixing illegal. But in international markets, large companies such as Standard Oil and Royal Dutch/Shell agreed to limit advertising and control prices. Such agreements were often broken. Within the United States, government regulation seemed the only answer. Congress put a high import duty on foreign oil and placed tight controls on production levels at home. Federal agents patrolled the oil fields to stop illegal production. With the Connally Hot Oil Act in 1935, the Roosevelt administration finally managed to bring the oil industry under control. The price of crude oil rose above one dollar per barrel and stayed there for the rest of the decade.