7.9 The Great Depression

Stock prices soared in the late 1920s. Many investors bought on margin, paying as little as 10 percent of a stock's price and borrowing the rest, betting prices would keep rising. When prices began to fall in October 1929, lenders demanded repayment, forcing more sales. On Black Tuesday, October 29, 1929, the market collapsed. By 1932 the Dow Jones average had lost close to 90 percent of its 1929 peak value.

• Overproduction and underconsumption: factories and farms produced more than people could buy, especially as wages lagged behind productivity.
• Unequal income: much of the decade's gains went to the wealthy, so ordinary families couldn't keep buying.
• Farm crisis: farmers had struggled with low prices and debt throughout the 1920s.
• Too much debt: installment buying and margin loans left households and investors overextended.
• Weak banks: thousands of small, unregulated banks made risky loans. With no deposit insurance, rumors caused bank runs, in which depositors rushed to withdraw money. About 9,000 banks failed between 1930 and 1933, wiping out savings.
• Policy mistakes: the Federal Reserve let the money supply shrink, and the Hawley–Smoot Tariff (1930), which raised tariffs sharply, led other countries to retaliate, so world trade collapsed.
• International debts: European countries owed the U.S. war debts and relied on American loans; when the loans stopped, the Depression spread worldwide.

By 1933 about a quarter of workers were unemployed, and the economy's total output had fallen by about a quarter since 1929. Families lost homes and farms. Shantytowns of homeless people were mockingly called 'Hoovervilles'.

On the southern Plains, years of drought and dust storms created the Dust Bowl. Farmers had plowed up native grasses during the wartime wheat boom, so when drought struck in the 1930s, wind blew away the topsoil. Hundreds of thousands of 'Okies' and others migrated to California, often finding only low-paid farm work, a story told in John Steinbeck's The Grapes of Wrath (1939).

Hard times hit minorities hardest. Black workers were often 'last hired, first fired'. Hundreds of thousands of Mexicans and Mexican Americans, including many U.S. citizens, were pressured or forced to leave for Mexico in repatriation campaigns.

Hoover was not a do-nothing president, but he believed in 'rugged individualism' and voluntarism, meaning cooperation by business, local governments and charities rather than direct federal aid to individuals. He asked business leaders not to cut wages and supported public works like what became the Hoover Dam.

In 1932 he created the Reconstruction Finance Corporation (RFC), which lent money to banks, railroads and large businesses, and later to states. Critics said it helped those at the top while hungry families got nothing directly.

In summer 1932 about 15,000 to 20,000 World War I veterans, the Bonus Army, camped in Washington to demand early payment of a promised bonus. Hoover ordered them removed, and troops under General Douglas MacArthur drove them out with tear gas and burned their camp. The scene helped doom Hoover, who lost the 1932 election to Franklin D. Roosevelt in a landslide.