order to protect American business. However these tariffs reached an
all-time high in the 1920’s and early 1930’s. Starting with the
Fordney-McCumber Act of 1922 and ending with the Hawley-Smoot Tariff
of 1930, the United States increased many tariffs by 100% or more(end
note 34). The effect of these tariffs was that Europeans were unable
to sell their own goods in the United States in reasonable quantities.
In the 1920’s the United States was trying “to be the world’s
banker, food producer, and manufacturer, but to buy as little as
possible from the world in return.”(end note 35) This attempt to have
a constantly favorable trade balance could not succeed for long. The
United States maintained high trade barriers so as to protect American
business, but if the United States would not buy from our European
counterparts, then there was no way for them to buy from the
Americans, or even to pay interest on U.S. loans. The weakness of the
international economy certainly contributed to the Great Depression.
Europe was reliant upon U.S. loans to buy U.S. goods, and the U.S.
needed Europe to buy these goods to prosper. By 1929 10% of American
gross national product went into exports(end note 36). When the
foreign countries became no longer able to buy U.S. goods, U.S.
exports fell 30% immediately. That $1.5 billion of foreign sales lost
between 1929 to 1933 was fully one eighth of all lost American sales
in the early years of the depression(end note 37).
Mass speculation went on throughout the late 1920’s. In 1929
alone, a record volume of 1,124,800,410 shares were traded on the New
York Stock Exchange(end note 38). From early 1928 to September 1929
the Dow Jones Industrial Average rose from 191 to 381(end note 39).
This sort of profit was irresistible to investors. Company earnings
became of little interest; as long as stock prices continued to rise
huge profits could be made. One such example is RCA corporation, whose
stock price leapt from 85 to 420 during 1928, even though it had not
yet paid a single dividend(end note 40). Even these returns of over
100% were no measure of the possibility for investors of the time.
Through the miracle of buying stocks on margin, one could buy stocks
without the money to purchase them. Buying stocks on margin functioned
much the same way as buying a car on credit. Using the example of RCA,
a Mr. John Doe could buy 1 share of the company by putting up $10 of
his own, and borrowing $75 from his broker. If he sold the stock at
$420 a year later he would have turned his original investment of
just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the
broker). That makes a return of over 3400%! Investors’ craze over the
proposition of profits like this drove the market to absurdly high
levels. By mid 1929 the total of outstanding brokers’ loans was over
$7 billion(end note 41); in the next three months that number would
reach $8.5 billion(end note 42). Interest rates for brokers loans were
reaching the sky, going as high as 20% in March 1929(end note 43). The
speculative boom in the stock market was based upon confidence. In the
same way, the huge market crashes of 1929 were based on fear.
Prices had been drifting downward since September 3, but
generally people where optimistic. Speculators continued to flock to
the market. Then, on Monday October 21 prices started to fall quickly.
The volume was so great that the ticker fell behind(end note 44).
Investors became fearful. Knowing that prices were falling, but not by
how much, they started selling quickly. This caused the collapse to
happen faster. Prices stabilized a little on Tuesday and Wednesday,
but then on Black Thursday, October 24, everything fell apart again.
By this time most major investors had lost confidence in the market.
Once enough investors had decided the boom was over, it was over.
Partial recovery was achieved on Friday and Saturday when a group of
leading bankers stepped in to try to stop the crash. But then on
Monday the 28th prices started dropping again. By the end of the day
the market had fallen 13%(end note 45). The next day, Black Tuesday an
unprecedented 16.4 million shares changed hands(end note 46). Stocks
fell so much, that at many times during the day no buyers were
available at any price(end note 47).
This speculation and the resulting stock market crashes acted as
a trigger to the already unstable U.S. economy. Due to the
maldistribution of wealth, the economy of the 1920’s was one very much
dependent upon confidence. The market crashes undermined this
confidence. The rich stopped spending on luxury items, and slowed
investments. The middle-class and poor stopped buying things with
installment credit for fear of loosing their jobs, and not being able
to pay the interest. As a result industrial production fell by more
than 9% between the market crashes in October and December 1929(end
note 48). As a result jobs were lost, and soon people starting
defaulting on their interest payment. Radios and cars bought with
installment credit had to be returned. All of the sudden warehouses
were piling up with inventory. The thriving industries that had been
connected with the automobile and radio industries started falling
apart. Without a car people did not need fuel or tires; without a
radio people had less need for electricity. On the international
scene, the rich had practically stopped lending money to foreign
countries. With such tremendous profits to be made in the stock market
nobody wanted to make low interest loans. To protect the nation’s
businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff
of 1930). Foreigners stopped buying American products. More jobs were
lost, more stores were closed, more banks went under, and more
factories closed. Unemployment grew to five million in 1930, and up to
thirteen million in 1932(end note 49). The country spiraled quickly
into catastrophe. The Great Depression had begun.