Americans in 1929 wanted to believe they were on what one analyst described as an, “. . . unlimited escalator of progress.” President Hoover announced at his inauguration that, “. . . the day [is near] when poverty will be banished from this nation.” Shortly thereafter the Stock Market Crash set in motion events that, combined with worldwide economic decline, created the Great Depression. America’s response to this crisis can be looked at in at least two ways through two potential thesis statements for this article. Try, “Drunk with nostalgia for the American Dream, the federal government took on the impossible task of making it come true for everyone.” Or, “Faced with unprecedented economic collapse and a resurgence of totalitarianism in Europe, the federal government rose to the occasion with innovative legislation and a commitment to defend freedom on a global scale.” I wrote both of those sentences and can never decide which is true. Maybe they both are—what do you think?
Margin buying had contributed to the notion that our prosperity would never end. You could buy stocks with as little as 10% down in the 1920s. Inflated stock prices were going up so fast that after a short time you could make enough to pay back the 90% you borrowed from your broker with interest while still making a tidy profit. Then you went home and put the proceeds in savings, no? No. Most people could not resist borrowing more money to purchase even more stock at 10% down. Stock prices were wildly inflated as a result. Furthermore, large stockholders “pumped and dumped” stocks by purchasing large amounts of stock in companies like RCA and then paying journalists to pump up the reputation of the company. Three or four wealthy people would sell the stock among themselves to create the impression that there was a boom on a hot stock. When regular people (the suckers) began to buy the stock in earnest, the pool men would let the stock go a little higher, then sell all they had reaping huge profits on what quickly became nearly worthless stock. Both severe margin buying and “pump and dump” schemes are illegal now because they dramatically removed the Stock Market from the actual value of the American economy, hence the crash.
The separation from actual national economic growth was understandable, however, with stories like that of a millionaire who turned his one million into thirty million in just eight months buying and selling stocks. Even a peddler was reported to have invested $4,000 at the same time and came out with $250,000. In 1927 there was a 40% rise in stock prices (not values). In 1928, prices went up another 35%. By September of 1929, stock prices were 400% above their level only five years earlier when Coolidge was president. In some inexplicable way, however, people began to collectively fear a collapse and began to “Sell! Sell! Sell!” on October 23rd, 1929. Few buyers came forward. Sensing a crash was imminent, Charles Mitchell saved the Market by organizing massive stock purchases by his bank and those of his associates. They staved off disaster for six days, largely because two of those days were on a weekend. On October 29th, however, another sell-off began which neither Mitchell nor anyone else could stop. By June of 1932, stock prices were at a level 50% below prices in Coolidge’s day. The Stock Market had crashed.
The collapse of the inflated Stock Market is only the second domino that led to the Great Depression. Falling farm prices after World War I was the first, and by the end of 1929, the third was the fact that consumption dropped in a society with a consumer-based economy. Suddenly, “needs” went back to being luxuries or dreams. The US economy averaged a 50% slowdown in all indicators. As many as one third of the population was unemployed by 1933! Many fortunes were lost; those on the edge had nothing. Some remained prosperous like Joseph P. Kennedy, father of future President JFK, who had amazingly sold everything he had in the Stock Market just before the crash. He waited until prices bottomed out, and then put all his cash back in the market, ultimately reaping huge profits. Even the fortunate few who pulled that trick off had companies go bankrupt because of a lack of business, and laying workers off deepened the depression. Food lines formed! In America!