The other day my eldest daughter asked me what had caused the Great Depression and what it was all about. (She’d been studying the era at school, in case you’re wondering where that came from.)
I started to come up with an explanation, but I rapidly realised that it’s a tough subject to do justice to on a Tuesday evening.
I also thought that it’s probably a subject that lots of people (including me) would like to have a quick bluffer’s guide to.
But there’s way too much of it for just one Money Morning. So I’m going to spend the next few Fridays unpacking the topic. Feel free to chip in with your feedback in the comments, because a lot of this is by no means cut and dried.
So this week, let’s pick up with where it all began – and take a quick romp through the Roaring ’20s…
The Roaring ’20s: from depression to Great Depression in less than a decade
The Roaring ’20s started off in the same way as they ended – with a depression. Or rather, they began with the depression that never was.
I’ve already written about this, but the short version is that between the start of 1920 and the summer of 1921, there was a huge economic collapse in the US, and a stockmarket crash. The government of the day did almost nothing to stop it, and less than 18 months after it had began, it was over.
What caused it? It was partly down to the huge influx of workers after World War I ended, as more than a million soldiers re-entered the workforce. This in turn made it harder for the unions to bargain for higher wages. People also expected prices to fall, after the inflation they had experienced during the war.
In any case, by the end of the crash, stocks were cheap (the Dow Jones Industrial Average had almost halved in value between late 1919 and 24 August, 1921, when it bottomed out at 63.9), prices in general had fallen hard (by up to a fifth on some measures), and wages had fallen too. The widespread availability of inexpensive resources set the scene for a massive recovery.
Now, life wasn’t rosy for everyone. If you were a farmer, things were tough. Farmers had done well during the war, but as agricultural production recovered in Europe, there was less demand for their goods. In effect, they’d massively over-expanded during the war, and taken on a lot of debt to buy new land. They now had too much capacity and many were left in a precarious financial position.
Indeed, during the 1920s, notes Gene Smiley of Marquette University on the Economic History Association website, “for the first time in American history, the number of cultivated acres actually declined as farmers pulled back from the marginal farmland brought into production during the war”.
Coal miners had it tough too. Mechanisation was boosting supply, while a mixture of improved energy efficiency and competition from other fuel sources was hitting demand. Other traditional industries such as textile work were also under threat from automation.
But overall, from 1923, America was on a roll.
The Roaring ’20s: the rise of the American middle class
It’s hard to exaggerate just how advanced the economy was in many ways compared to Europe. Mass production was enabling mass car ownership – by the end of the 1920s, roughly 60% of American families owned a car (in the UK, by 1938, the figure was still below 20%).
Access to cars and the expansion of the roads to drive them on was opening up new areas of the country (notably Florida), creating booms in tourism, land prices, and the ever-expanding suburbs. Trucks competed with railroads to carry goods and commodities across the continent.
(The shaping of America as a car culture and the slow demise of public transport dates back to this era, partly because of the way that the railroads were regulated, which is an extremely interesting story in itself – but not a story for today.)
Electricity was spreading and demand soaring – indeed, electricity utilities (the ultimate in “boring” companies these days) were among the most glamorous stocks of the era. By 1929, most US households had electricity.
Communications technology was transforming industry and – alongside the car – enabling populations to spread out. By the end of the 1920s, more than 40% of all American households had a telephone.
Even more had a radio, providing news, entertainment, and adverts for a myriad of wonderful new electric household products that were hitting the market – fridges, washing machines, vacuum cleaners.
And the rising availability of consumer credit gave middle-class Americans the means to buy them. Which was important, because as Edward Chancellor points out in Devil Take the Hindmost, his great history of booms and busts, the weakened union movement meant that, overall, workers’ wages didn’t keep up with company profits or with inflation during the 1920s.
So while asset prices went up (similar to today) and the general standard of living went up, the latter was fuelled to a great extent by debt, rather than outright ownership.
The Roaring ’20s: the booming stockmarket
The rising availability of credit gave Americans the means to buy something else too: stocks. Only around 16% of US households were invested in the stockmarket, but those who were, increasingly used borrowed money to do so.
On 24 August, 1921, at the bottom of the early 1920s crash, the US stockmarket – the Dow Jones Industrial Average – stood at 63.9. By the peak on 3 September, 1929, it had risen to 318.17.
In other words, if you had invested $1,000 at the bottom, then by the top, you’d have nearly $6,000 (not including dividends). And of course, if you’d used borrowed money to do it, you’d have many multiples of that sum.
We’ll talk about the stockmarket crash specifically in a couple of weeks’ time. But as with many other unsustainable booms in history, it started with a market that was cheap and an exciting set of stories about technological development.
It was driven to over-confident excess by people who saw an opportunity to get rich quick, and in their haste, abandoned all concerns about the potential risks. As the comedian Groucho Marx – who lost a fortune in the bust – put it: “You could close your eyes, stick your finger any place on the big board and the stock you bought would start rising.”
Financial vehicles – in this case, investment trusts – were launched to take advantage of this enthusiasm for stocks and to direct more money into the market (and into the pockets of the financial industry). There was a huge amount of fraud, and insider dealing was rife.
And of course, there was hubris.
In 1928, Republican Herbert Hoover was elected president after his predecessor, Calvin Coolidge, decided against standing for another term (a rare example of a political leader who got out on time). In his speech accepting the nomination, Hoover said: “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.”
Incidentally, there’s something worth understanding about Hoover. He has a reputation for being a “do-nothing”, “laissez-faire” kind of guy, mainly because of how the Great Depression panned out. That’s a fair description of Coolidge, but as far as Hoover goes, nothing could be further from the truth.
He was keen on efficiency and believed in individuals looking after themselves, but he was also extremely “hands-on” and a believer in purposeful government as a force for good.
A former mining engineer, he came to prominence by organising relief efforts to get food to Belgium in 1914 and to central and Eastern Europe after the war (John Maynard Keynes had expressed rare admiration for him during the post-World War I negotiations in Paris). He had also expressed nervousness about the stock market boom on several occasions before he became president.
But in the end, he had bad timing. And for all his talk of abolishing poverty, within a couple of years, America would be dotted with squalid shanty towns bearing his name – “Hoovervilles”.
We’ll get to the crash that signalled the start of that decline in a couple of weeks’ time. Next week, I want to take a quick detour to Britain, where the ’20s were anything but “roaring”.