EVENTS OF THE 1920s
Most historians agree that the stock market crash of October 1929
did not "cause" the Great Depression. It was the most visible
and symbolic event ushering in the worst of it all, but the economy actually
began sliding downhill years before.
The reigning economic philosophy of the Roaring Twenties was laissez-faire
("leave it alone" or "let it be.") This was the belief
that markets always know best and that government should not regulate or
otherwise interfere with their self-correcting operations. The policy was
most strictly applied during the Republican presidencies of Warren Harding
(1920-1923) and Calvin Coolidge (1923-1928).
Herbert Hoover (president from 1929-1933) also held a deep faith in
individualism and the magic of the market, but was not quite the laissez-faire
ideologue that Coolidge and Harding were. Just before Roosevelt and his
advisors took over the White House in 1933, Hoover was to complain that
the "brain trust and their superiors are now announcing to the world
that the social thesis of laissez-faire died on March 4. I wish
they would add a professor of history to the brain trust."
In fact, Hoover did respond to the deepening crisis through government
action. As the time line in the next section will show, however, almost
all this intervention occurred during his last year in office, long after
the damage had already been done. Hoover lost the election in a landslide
because the public perceived he had not done enough to arrest the plunging
However, if you look at the economy even before Hoover took office
in March 1929, or the stock market crash seven months later, it becomes
clear the Depression had deep roots that extended back many years.
In describing the Roaring Twenties, it is interesting to note that
they bear many striking resemblances to the 1980s. Both eras were dominated
by Republican presidents who slashed government regulation and anti-trust
enforcement. Both saw a wave of mergers and the rise of monopolies. Both
saw labor unions decline in membership and influence. During the Roaring
Twenties, the top tax rate was cut from 73 to 25 percent; during the 80s,
this was cut from 70 to 28 percent. Both eventually allowed the richest
1 percent to own 40 percent of the nation's wealth, with middle class income
either stagnating or declining. Both saw disinflation caused by tight monetary
policies, sinking commodity prices and high real interest rates. Both saw
the stock market soar to unrealistic heights amidst a reckless orgy of
debt. And both saw massive stock market crashes (in '29 and '87) as the
speculation bubble burst. Fortunately, the Fed today knows how to lessen
the severity of recessions, which may explain why the recession of 90-92
did not worsen into a depression.
Laissez-faire in the Roaring Twenties created an economy filled
with paradoxes and inequality. While manufacturing, finance and services
all enjoyed high times, agriculture, mining and energy struggled with their
own depressions throughout the decade. The stock market would go through
the roof, despite the fact that the economy itself was structurally flawed.
Phenomenal economic growth was centered in only two industries: construction
and automobile manufacturing. Even these two star industries would begin
contracting in the year before the stock market crash.
The banking sector is a vivid example of the results of deregulation
and unenforced anti-trust laws. The biggest banks never did better. Other
banks found themselves in constant trouble, with 600 banks failing each
year. Although most were conservative in making their loans, many did not
have adequate reserves to cover defaults, which were especially common
among farmers. The lack of a banking watchdog allowed some bankers to speculate
wildly on the stock market or make foolish loans. There was also no Federal
Deposit Insurance Corporation (FDIC) that protected and regulated customers'
banking deposits. As a result, customers frequently paid for the sins of
their bankers. And the lack of a federal safety net often turned temporary
banking troubles into permanent bankruptcies.
For most of the Roaring Twenties, the economy grew as long as its capital
facilities grew (factories, warehouses, heavy equipment, etc.). But by
the time the stock market crashed, there was so much plant space producing
so many goods that the backlog of inventory was three times greater than
normal. Half of America was living at or below the minimum subsistence
level and could not afford to buy these products. Factory workers were
paid so little that they often could not afford the goods they were producing.
According to Say's Law, "supply creates its own demand."
A glut of goods on the market is supposed to be impossible, because the
public's demand is infinite; therefore, there can only be shortages of
supply. Say's Law is a favorite among conservatives, even though mainstream
economists debunked this 18th century "law" over 60 years ago.
It is a fact of economics that all recessions are preceded by a glut of
goods on the market, and this was especially true before the stock market
crash of '29. Supply was everywhere; demand nowhere. Why? Because a growing
number of poor people chose to hoard their money rather than spend it.
This is a rational anti-poverty strategy for individuals, but it
has unintended and damaging consequences for the group.
The worsening of the economy in the years before the stock market crash
is troubling for conservative defenders of the Roaring Twenties. The economic
policies were strictly Republican; there was no Big Government to blame
for the onset of the Depression. Money was based on the gold standard,
yet another pet conservative ideology. The tax burden was the lightest
since World War I to this day. Yet even before October 29, 1929, it was
clear that the economy was in trouble and that things were only going to
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