The widespread prosperity of the 1920s ended abruptly with the stock market crash in October 1929 and the great economic depression that followed. The depression threatened people's jobs, savings, and even their homes and farms. At the depths of the depression, over
one-quarter of the American workforce was out of work. For many Americans, these were hard times. The New Deal, as the first two terms of Franklin Delano Roosevelt's presidency were called, became a time of hope and optimism. Although the economic depression continued throughout the New Deal era, the darkest hours of despair seemed to have passed. In part, this was the result of FDR himself. In his first inaugural address, FDR asserted his "firm belief that the only thing we have to fear
is fear itself--nameless, unreasoning, unjustified terror." As FDR provided leadership, most Americans placed great confidence in him. The economic troubles of the 1930s were worldwide in scope and effect. Economic instability led to political instability in many parts of the world. Political chaos, in turn, gave rise to dictatorial regimes such as Adolf Hitler's in Germany and the military's in Japan. (Totalitarian regimes in the Soviet Union and Italy predated the depression.) These
regimes pushed the world ever-closer to war in the 1930s. When world war finally broke out in both Europe and Asia, the United States tried to avoid being drawn into the conflict. But so powerful and influential a nation as the United States could scarcely avoid involvement for long. When Japan attacked the U.S. Naval base at Pearl Harbor, Hawaii, on December 7, 1941, the United States found itself in the war it had sought to avoid for more than two years. Mobilizing the economy for world
war finally cured the depression. Millions of men and women joined the armed forces, and even larger numbers went to work in well-paying defense jobs. World War Two affected the world and the United States profoundly; it continues to influence us even today. Part of
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Written by: Paul Dickson, Independent HistorianBy the end of this section, you will:
In the United States during the prosperous “roaring 20s,” the stock market underwent rapid and unprecedented expansion, reaching its peak value on September 3, 1929. This rise followed a period of wild speculation during which Americans ranging from millionaires to clerks and cab drivers were buying stocks (shares of ownership in a firm). Unlike wealthy investors, however, many of modest means poured their life savings into stocks using borrowed money, known as buying shares “on margin.” Buying stocks on margin brought hundreds of thousands of new investors into the market. Under the loose rules of the time, they could purchase a stock by simply laying down 10 percent of its cost and borrowing the rest from banks or stockbrokers – buying, for example, $1,000 worth of a stock and handing over just $100 in cash. If your $1,000 in stocks then rose in value to $1,075, you made $75 on your $100 investment when you sold the stock – or so it seemed. That $75 profit existed only on paper, because you still had to pay back the bank or broker who loaned you the $900 at a rate somewhere in the neighborhood of 14 to 19 percent. Investors at that time did not seem to care all that much, however, because they were making money. To many, buying stocks on margin was easy money and a way to get rich quick. But if your stock went down in value, the broker would demand more and more of the loan to be paid in cash to cover the loss.  The interior of the New York Stock Exchange, pictured here in 1920, where thousands of stocks were traded daily using telephone booths scattered throughout the trading floor. The market high of September 3, 1929, came the day after the end of the long Labor Day weekend. It also marked the end of what later became known as the “summer of fun,” when an epidemic of dance marathons, flagpole-sitting contests, and other zany fads seemed to have taken hold of the country. There was a madness in the air that seemed hard to explain. Among other things, this was the moment when Americans started drinking sauerkraut juice for no apparent reason – a fact noted by Maury Klein in his definitive narrative on the history of the Crash. He wrote: “In the summer of 1929 much of America was on an artificial high. It was a high not born of drugs but of an illusion that the prosperity and the good times then being enjoyed were made of new miracle ingredient that would last forever.” Following that peak, stock prices fell by approximately 10 percent during September but then rose again by about 8 percent by the middle of October. The fluctuations seemed relatively normal because the market often went up and down. However, on Thursday, October 24, a selling panic began and 13 million shares were traded, which far surpassed the average of four million shares per day the preceding month. The market had taken a nose dive, and investors found themselves in the dark as their paper fortunes began to dwindle or disappear. The technology of the time – telephone, telegraph, and ticker tape – was not able to keep up with the pace of trading, and many investors did not learn of their losses until late that evening. October 24 was quickly given the name “Black Thursday.” On Friday, President Herbert Hoover tried to stop the panic by assuring Americans that the business of the country was “on a sound and prosperous basis,” but neither his words nor the attempts by some of the big banks and major investors to shore up the value of stocks by purchasing them at artificially higher prices had any effect on stemming the tide of stock selling. The fall slowed on Monday, but then on Tuesday, October 29, 1929, the bottom fell out of the market. On “Black Tuesday,” 16 million shares were traded on the New York Stock Exchange. Investors lost billions of dollars as millions of shares plummeted in value and even became worthless. Those who had bought stocks with borrowed money were wiped out completely. Millions of Americans lost everything. Suddenly the “roaring 20s” ceased to roar, and it looked like the fabulous decade would end with a whimper. After the stock market crash of 1929, thousands of American depositors flooded banks like this one in New York, hoping to withdraw their money before it was lost. The Wall Street Crash of 1929 was soon viewed as the moment the nation began to realize that a terrible catastrophe was unfolding. The biggest and most productive economy on earth was falling apart, and it was bringing the other industrialized nations down with it. Then, as now, the Crash was regarded as the opening bell for the Great Depression. Although some would see it as the single or primary cause of the Great Depression, in fact it was a symptom and a powerful catalyst, but not the primary cause. Robert McElvaine explained it in human terms in The Great Depression: America 1929-1941:
But the role of the Crash in shaping the dimensions of the economic catastrophe that followed cannot be overestimated. As T. H. Watkins put it inThe Hungry Years, the Great Crash “not only loosed the virus of depression by imposing a trauma on the entire financial system so devastating it was left in a state of shock, but also accelerated the spread of economic decline.” The causes of the Crash and the causes of the Depression were interrelated and followed the same path forward. By 1932, stocks were worth only about a fifth of what they had been worth during the summer of 1929, and July 8, 1932, turned out to be the lowest point of the Crash. It is often argued that 1932 was the year the nation hit rock bottom. Exactly 2,998 banks had failed and 28,285 businesses had closed in 1931, and in 1932, they were still closing at an alarming rate. Unemployment had soared to 25 percent, leaving one family in four without a breadwinner, and millions were underemployed, taking pay cuts and reductions in hours to keep their jobs. Two million people, including many farmers, were turned into homeless migrants who wandered the country in a random and futile quest for work. Many settled in teeming communities of makeshift shacks and shanties known derisively as “Hoovervilles,” mocking the president who kept trying to tell the country that things were not as bad as they seemed and that recovery was around the corner. A Depression-era “Hooverville” shanty town in Manhattan, where huts were made of salvaged materials and most occupants, having lost their homes and jobs, were unable to find work. Hoover was beaten in the 1932 election by Franklin D. Roosevelt, who was inaugurated in March 1933. Roosevelt immediately revealed his plan to temporarily close all banks to confirm the solvency of those still standing and to stop bank runs. Legislation to enable this bold move was quickly enacted. A special session of Congress convened and responded to the crises. Congress quickly passed the bill, and banks were allowed to reopen if government officials deemed them financially secure. In the next three days, 5,000 banks reopened their doors, to the relief of many people who had deposited their life savings in them. Reforms and regulations provided certain relief to the system, which helped some areas of the economy and included the creation of federal deposit insurance, with which the federal government guaranteed most people’s savings – a protection that is still in effect and that has so far prevented further banking runs in the United States. But this and many other efforts of Roosevelt’s New Deal did not end the Great Depression. Economic recovery did not occur until the nation began shifting to a wartime economy after Nazi Germany invaded Poland in September 1939. When World War II ended in 1945, the nation experienced a period of unprecedented prosperity, though the stock market did not return to its pre-Crash levels until November 23, 1954. Some of the signs that a basically unsound economy had both caused and fueled the Depression were easier to see after the Great Crash. They included an increase in unemployment, cuts in industrial production, and an increase in consumer borrowing, especially the practice of buying stocks on margin. Review Questions1. Most of those who purchased stocks during the 1920s
2. “Black Tuesday” can most accurately be described as the day
3. By 1932, the Great Depression had caused
4. A major political reaction to the Great Depression was the
5. Signs of an unsound economy before the Wall Street Crash of 1929 included
Free Response Questions
AP Practice QuestionsThe graph shows the value of the Dow Jones Industrial Average, an index of stock prices that represents the overall value of the stock market. Shown here is the average from October 1929 to October 1930. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license) Refer to the image provided.1. Which of the following was most directly related to the events depicted in the graph?
2. Which of the following most directly contributed to the trend depicted in the graph?
3. The economic event depicted in the graph is most similar to which nineteenth-century event in U.S. history?
Primary SourcesMcElvaine, Robert S., ed. Down and Out in the Great Depression: Letters from the Forgotten Man. Chapel Hill, NC: University of North Carolina Press, 2008. Suggested ResourcesKennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. Oxford, UK: Oxford University Press, 1999. Klein, Maury. Rainbow’s End: The Crash of 1929. Oxford, UK: Oxford University Press, 2001. McElvaine, Robert S. The Great Depression: America 1929-1941. New York: Times Books, 1993. Parrish, Michael E. Anxious Decades: America in Prosperity and Depression, 1920-1941. New York: W. W. Norton & Company, 1992. What contributed to the economic instability of the United States in 1929?While the October 1929 stock market crash triggered the Great Depression, multiple factors turned it into a decade-long economic catastrophe. Overproduction, executive inaction, ill-timed tariffs, and an inexperienced Federal Reserve all contributed to the Great Depression.
What happened to the US economy in 1929?The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors.
What were three major causes of the crash of 1929?By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the stock market crash of 1929 were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated.
What major weakness has appeared in the American economy by 1929?Financial Collapse
In 1929, it did. A Flawed U.S. Economy Despite prosperity, several weaknesses in the U.S. economy caused serious problems. These included uneven distribution of wealth, overproduction by business and agriculture, and the fact that many Americans were buying less.
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Which of the following directly contributed to the economic instability of United States in 1929?
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