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The stock market crash of October 1929 was a natural consequence of the greatest orgy of speculation and over-optimism. After a postwar recession (or minor depression) of 1920, security prices recovered, business readjusted. Increased investment was largely
responsible for the rise until 1925, when speculation raised it to a giddy height. A general euphoria drew more and more "suckers" into the speculative market; brokerage houses opened branches in small towns and near college campuses.
American prosperity, Germany's remarkable recovery after 1924, and the growth of world trade justified a rise in security values, but they rose much further than was justified. And when speculation began to get out of hand, neither the federal nor the state governments did anything effective to check it. They, of course, could not check human greed and folly; but the Federal Reserve Board and Trade Commission might have applied certain brakes. The main reason they did not is that, since 1921, these bodies had been diluted by political hacks or Republican financiers who did not believe in the regulative functions which they were supposed to perform. Thus, the Federal Reserve Board was unable to make up its mind what to do, or to do anything, at critical junctures. Secretary Hoover worried about "this fever of speculation", as he called it in a press release of 1 January 1926, warned against overextension of installment buying, and even criticized the easy credit policies of the Federal Reserve system.
Coolidge, who saved money from his presidential salary, and who never gambled a nickel in a slot machine, much less a dollar in stocks, regarded the speculative orgy with detached complacency; his philosophy forbade interference with "the law of supply and demand". And no wonder people were overconfident, since even some old progressives and socialists went overboard, e.g. Walter Lippmann in 1928 praised the "unplanned activities of big business men".
There was a great deal wrong, besides overspeculation, with the national economy and the laws regulating it. Corporations, which as early as 1919 employed 86.5 per cent of all wage earners in industry, were proliferating under practically no control. Certain states such as Delaware and New Jersey allowed anyone paying a registration fee to incorporate a company, leaving its directors free to issue new stock, and with no obligation to make an annual report or accounting. The number of Delaware incorporations with authorized capital stock of $20 million or more, rose from 55 in 1925 to 619 in 1929. One characteristic device was to form a holding company. Holding companies were often so rigged that an outsider who bought stock knew nothing of what was going on, and the insiders profited, just as railway construction groups did in the days of President Grant. Stockholders of three of the biggest — Electric Bond & Share, Standard Gas & Electric, and Cities Service (235,000 shareholders in 1925) — were not vouchsafed any information about the subsidiaries' earnings, on which theirs depended.
The stock market had already begun to act queerly. On October 1, there was a spectacular drop during the last hour of trading, when almost 13 million shares changed hands. It became known as "Black Thursday". Spokesmen for bankers and brokers insisted that the worst was over, but 28 and 29 October were even more terrible days, from which there was no recovery. Stocks reached new lows on November 13, rose slightly during the early months of 1930, but in April began a downward slide that continued with only brief interruptions to rock-bottom in mid 1932.
Economic analysis failed to discern the serious faults in American and European economics and their increasing vulnerability to shock. Among the weak points were the tremendous volume of stock market, mortgage, and installment-buying debts; the chaotic American banking system, precarious European currencies, and the war reparations question, supposedly but not really settled. President Hoover, in his message of December 2, 1930 rightly pointed out that soft spots in European economy infected America.
Thus, the stock-market crash of 1929 started a downward spiral in prices, production, employment, and foreign trade. Collapse in commodity prices reduced buying power everywhere and increased unemployment in all industrialized countries.
Before the end of 1929 the entire economy began to snowball downhill. Consumer buying declined sharply and the public, leery of banks, cashed currency in safe-deposit boxes and mattresses. Every kind of business suffered, and had to discharge employees; they, unable to find other jobs, defaulted installment payments and exhausted their savings to live. To some extent the misery was relieved by the charity of employed relatives or by returning to a parental farm; but America, unlike Britain, then had neither social security nor unemployment insurance. This tailspin of the economy went on until mid-1932 when around 12 million people, about 25 per cent of the normal labor force, were unemployed. In the cities there were soup kitchens and breadlines. Factory payrolls dropped to less than half of those of early 1929. Not until 1932, when the Democrats controlled the House, and a coalition of Democrats and Republican progressives ran the Senate, were vital measures taken to cope with the depression. By that time an estimated one to two million men were roaming the country looking for jobs or handouts, and more than too cities had no relief money left. In January, President Hoover signed a bill creating the Reconstruction Finance Corporation for lending money to railroads, banks, agricultural agencies, industry, and commerce. During the rest of the Hoover administration, the RFC stopped many bankruptcies by feeding in money at the top, but this did little to restore the economy. In the next three years, under Roosevelt, with vastly greater appropriations, the RFC came to the aid of 7000 banks and trust companies to the tune of $3.5 billion. Loans to mortgage-loan companies and to insurance companies and railroads took up $1 billion more. Loans to industry and to agriculture in one form or another came to over $2.6 billion.
President Hoover meant very well, labored hard to find solutions, and sought advice; but nothing seemed to work because, being the prisoner of fixed ideas, and surrounded by like-minded men, he refused to try anything new or bold. Americans were angry and desperate, but they still had faith in their country and its institutions. They were only waiting for a leader to show them the way out.
