By September of 1929, nervous investors began selling stocks in order to get out of the market while prices were still high. As the volume of selling increased, stock prices began to fall in October. On October 24 (Black Thursday) and October 29 (Black Tuesday), prices fell drastically as sellers panicked. By December, a staggering $40 billion in stock value had been lost. Hoover and business leaders attempted to calm Americans by assuring them that the country's economy was fundamentally sound. J.P. Morgan and other bankers bought $20 million of U.S. Steel to try to restore confidence, but to no avail. The Stock Market Crash of 1929 did not by itself cause the American economy to collapse. Many factors contributed to a situation so precarious that this event was but the first of a cascade of collapses on many different fronts around the entire world.

One weakness in the American economy was lack of diversification. Prosperity of the 1920s was largely a result of expansion of construction and automobile industries and their corollary industries such as the petroleum industry. Older businesses, such as coal, declined.

Poor distribution of income and purchasing power among consumers also contributed. By 1929, the top 10 percent of the nation's population received 40 percent of the nation's disposable income, but this 10 percent did not purchase the mass quantities of food and goods that were being turned out in the nation's farms and factories. Many farmers and factory workers, on the other hand, were unable to make the purchases of cars and houses that would have sustained economic growth. Farm income actually declined 66 percent from 1920 to 1929.

Overproduction of goods and farm products compared to the public's ability to pay for them dragged the economy down. Panicked farm and business owners plowed what profits they made not into wages of workers who would have been customers, but into ever-less-profitable plants and acreage. Industrialists, rather than increase wages, put their money into new production capacity. Massive business inventories (up 300 percent from 1928 to 1929) and food surpluses drove prices ever downward. As farms and businesses faltered, unemployment rose cutting the nation's purchasing power even more. Overproduction drove down prices, and things were cheap, but farmers and workers were too strapped to buy goods at any price.

While they seemed like wonderful innovations, new laborsaving machines for home, farm, and factory eliminated whole classes of jobs. Mass production of automobiles brought the price of cars to within the reach of the average person. By 1929, 26 million autos rumbled over American roads. But as the auto business thrived, the railroads, which had been a major pre-war employer, declined. The impact of technology caused newer businesses to supplant older ones, resulting in worker and resource dislocations. This pattern was repeated throughout the economy, such as synthetic rayon making inroads into the cotton and wool markets.

Real estate speculation also sapped the nation's economic strength. Upper- and middle-class people eager to parlay investment capital into a fortune often bought into fraudulent real estate opportunities promoted by unscrupulous agents. The standard ploy was to sell "tropical paradise" lots in Florida, sight unseen, to winter-chilled northerners at hugely inflated prices. When the buyer visited his or her property and found it to be a worthless swamp, a "local" company that was actually a subsidiary of the first company offered to buy it for what it was worth—next to nothing. The lot then went back on the market as bait for the next sucker. Though this was the most pernicious of the land speculation schemes, other methods of bilking the gullible in real estate abounded, and the losses added up in their drain on the economy.

Credit problems mounted through the twenties as businesses began offering installment buying options and easy credit to stimulate sales, and wage earners turned to time payments as a means to stretch their income. Both consumers and companies found it all too easy borrow more than they could pay back. As individuals and businesses became interdependent in their credit/debt dealings, default at any one point could ripple through the economy and cause other defaults.

Stock market speculation proved the weakest point in the credit/debt web. The New York Stock Exchange seemed to provide investors with yet another way to get rich quick. Stocks could be bought on a very small margin. An investor could purchase stock with a small amount of his or her own money and borrow the rest. The theory was that when the stock went up, it could be sold, the borrowed money paid back, and the remainder kept by the investor. Buying on margin enabled investors to leverage their own money into huge profits. But if the stock went down, the lenders still wanted their money at the close of the sale, and the investor would lose the margin. If the stock crashed altogether, the lenders as well as the investors lost everything.

Banking problems sounded another alarm that the economy was faltering. A string of banks failed in the late 1920s as customers, many of them farmers, were unable to pay their mortgages. Foreclosures dispossessed thousands, and banks turned from mortgages and loans to stock market speculation as a means to profitably invest their deposits. Low margins encouraged speculative investment on the part of banks both as investors and as lenders. Many bankers held small reserves as they attempted to capitalize on stock market growth. The crash wiped out not only their profit potential, but also the investment money the bank had sunk in the market. A run on the bank would then soon exhaust its reserves and cause it to close its doors.

Though the crash of the stock market did not cause the Great Depression, its magnitude accelerated the nation's economic downturn. Between 1929 and 1933, 100,000 businesses failed, corporate profits fell from $10 billion to $1 billion, and some 6,000 banks failed taking with them over nine million savings accounts amounting to a $2.5 billion loss to families and individuals. By 1933, 13 million workers were unemployed, which accounted for 25 percent of the workforce. Thousands of families lost their homes and farms in foreclosures. Tent cities and shantytowns sprang up and large numbers of homeless roamed the U.S. seeking work. Peoples' health suffered as a consequence of these hardships. Malnutrition increased, as did tuberculosis, typhoid, and dysentery. Many people had no other alternative than to turn to soup kitchens and breadlines for food. Even so, 95 people died in New York City from starvation in 1932.

Hoover's first response was to reject direct relief, believing any sort of welfare would undermine American moral character and the ideal of rugged individualism. He also rejected any program that smacked of socialism. This included the Muscle Shoals Bill that would have dammed the Tennessee River to provide electricity to the region, which he refused on the grounds that the government would then be selling power in competition with private companies.

Hoover urged Americans to turn to community and church resources such as the Salvation Army, Community Chest, and Red Cross to meet needs of the poor, and for state and local authorities to take responsibility for assisting individuals. On constitutional grounds, he felt the federal government should confine its action to large, general programs. Gradually, however, it became apparent that no entity except the federal government had the resources to address the profound suffering of the Great Depression. As local sources of assistance were exhausted, Harding's humanitarian nature required him to seek solutions in spite of almost universal advice from economists to allow the economy to hit bottom and find its own way out of the crater.

Hoover met with business and labor leaders exhorting them to avoid layoffs and strikes wherever possible. In addition, he signed the Norris-La Guardia Anti-Injunction Act in 1932 outlawing businesses from making anti-union, "yellow-dog" contracts. The act also prevented federal courts from issuing injunctions to restrain strikes, boycotts, and picketing.

Hoover approved federal financing of large work projects, such as the massive Boulder, Hoover, and Grand Coulee Dams to the tune of $2.5 billion. These projects could be justified both as providing jobs and as creating structures of great value to the nation.

In 1932, the Hoover administration set up the Reconstruction Finance Corporation (RFC) to make a half billion dollars in "pump-priming" loans to stimulate the economy in a "trickle-down" manner. Most of the benefit went to large corporations with little "trickling down" to small businesses or individuals. Even so, government projects and the RFC represented a substantial departure from the conservative position of no assistance, and they became the prototype to the New Deal programs of Franklin Roosevelt. Hoover slowly shed much of his resistance to federal policies aimed at helping individuals, but government was new to this kind of intervention. Not surprisingly, some of his programs were ineffective while some were actually counterproductive.

Hoover called a special session of Congress in 1930 to try to give farmers tariff relief, but the legislature allowed special interest groups to twist the original bill into a monster that raised tariffs to 60 percent instead of lowering them from the former 38 percent. Foreign countries that could no longer compete in American markets reacted by raising tariffs on American goods. The resulting economic isolation further stifled business that was already limping into the Depression.

Hoover was hampered in his attempts to alleviate the nation's distress by an increasingly hostile Congress that was eager to pin the blame on him and divert it from themselves and the political parties. In the mid-term elections of 1930, an angry electorate replaced many Republican congressmen and senators with liberals, and the House was controlled by Democrats. It seemed that political maneuvering often took precedence over the welfare of the nation. As Hoover bitterly commented, Congress "played politics with human misery."

A final blow to the Hoover administration was the Bonus Army, a group of 20,000 veterans who camped in makeshift shantytowns in Washington to lobby for immediate payment of their deferred insurance bonus. Congress vetoed a bill that would have acceded to their demands, and Hoover was left with the responsibility of disbanding the veterans. He managed to arrange transportation for 6,000, but the remainder were directed to leave on their own. They refused and Hoover ordered the army to evict the veterans. General Douglas MacArthur did so with unnecessary zeal, using bayonets and tear gas and burning the tents.

Hoover ran for reelection in 1932, but he was booed and jeered when he made his few campaign appearances outside Washington, perhaps because of his overly optimistic campaign slogans: "The Worst is Past" and "Prosperity is Just Around the Corner." Alarmed at what he saw as monumental and subversive changes suggested by Democratic candidate Franklin D. Roosevelt (FDR), Hoover accused him of seeking the destruction of capitalism.

Roosevelt rejected both Hoover's conservatism and the radical advice of socialists and communists. He aimed for a cautious liberalism, offered a "New Deal" for the "forgotten man," and promised a balanced budget along with economic reforms. His campaign slogan of "Happy Days are Here Again" seems no less saccharine than Hoover's, but perhaps it went down better with the voters since the Democratic Party platform also called for an end to Prohibition and an increase in federal relief, including aid to individuals. The election was a landslide for the Democrats. FDR won 57 percent of the popular vote, and Democrats took control of both the House and Senate.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education