It was only in 1927 that the Dow Jones Industrials had crossed the 200 mark for the first time since 1907. Now in August 1929, powered by rapid expansion in automobile production and growth in electric utilities, the Dow soared to an all time high of 381. Then the stock market began to fall. And that was just as well, according to President Herbert Hoover and the Federal Reserve. To forestall inflation, the Federal Reserve had been sterilizing inflows of gold into the United States since 1928, and the nation's money supply had started contracting. But then came Black Thursday and panic selling. By November 13, the Dow had declined below 200.
Late in 1929 President Herbert Hoover had received an analysis from the Federal Reserve that the correction had several months to run. Hoover was glad to expand a public buildings program to boost the economy. But the stock market continued to decline, as the president signed the Smoot-Hawley Tariff Act into law. Then the Jewish-owned Bank of United States in Manhattan failed.
As banks continued to fail the decrease in the money supply became so extreme that cities began to issue scrip and people began to barter. President Hoover continued to act. After the Austrian Creditanstalt Bank failed in May he proposed a moratorium on interest payments on international debt to Germany. But he vetoed the Muscle Shoals Bill for a government project to dam the Tennessee River and generate electricity.
The depression continued in 1932 and President Herbert Hoover actively intervened to reverse it. Congress passed and the president signed the Reconstruction Finance Act. It authorized the establishment of a Reconstruction Finance Corporation, modeled after the War Finance Corporation of World War I, and loaned money to banks, railroads, and agricultural organizations. The RFC also extended aid to state and local governments. In 1932, it dispersed a total of $1.5 billion. By 1932 the federal governments budget balance was seriously in deficit and President Hoover pushed the Revenue Act of 1932 through Congress. It raised individual tax rates with the top rate increasing from 25 percent to 67 percent, doubled inheritance taxes, and raised corporate income taxes by 15 percent.
In the November presidential election campaign, Governor Franklin D. Roosevelt of New York criticized the incumbent President Hoover for increasing government spending, blocking trade, and putting millions of Americans on the dole. Governor Roosevelt won the election in a landslide of 42 states to 6 and a popular vote of 57 to 40 percent over President Hoover. In the Senate elections the Democrats picked up 12 seats, and in the House elections an additional 97 seats. In the new 73rd Congress the Democrats controlled the Senate with 59-36 seats, and in the House with 313-117 seats.
As 1933 began the United States reached perhaps the nadir of its history. About 25 percent were out of work, industrial production had halved, millions were homeless, and the banks in many states were closed. Even the Federal Reserve Bank of New York closed its doors in the days before Franklin D. Roosevelt was inaugurated as 32nd President of the United States on March 4.
After a year of heady legislation the Roosevelt administration turned its attention to the punishing of the guilty, the men responsible for the crash. They would clear out the corrupt interests by exposing their deeds. First up would be Samuel Insull and Andrew Mellon.
But the New Deal zealots also found more humble folk in their sights, the Schechter brothers, who operated a kosher live poultry business in Brooklyn. The New Dealers found them in violation of the business codes of the National Industrial Recovery Act and took them to court. A year later the US Supreme Court overruled the government and found for the Schechters.
In the November Senate elections the Democrats gained 9 seats over the Republicans. In the House elections the Democrats gained 9 seats, the Republicans lost 14 seats, and the new Progressive Party gained representation in the House with 7 seats. In the 74th Congress the Democrats achieved a 69-25 majority, and in the House a 322-103 majority over the Republicans.
The National Industrial Recovery Act of 1933 had included provisions to legalize collective bargaining by organized labor. Once the NRA had been struck down Labor Secretary Frances Perkins and Senator Robert F. Wagner (D-NY) set about drafting a law to establish labor rights. The Wagner Act, the National Labor Relations Act of 1935 was a wide-ranging bill covering union organizing, labor-management relations, and legalizing the closed shop requiring union membership as a condition of employment.
The Social Security Act inaugurated a government pension system funded by a 2 percent tax on the first $3,000 of payroll income to begin in 1937. The act also included unemployment insurance, aid to the states for health and welfare programs, and the Aid to Dependent Children program.
In 1935 the federal government spent $9.2 billion with a deficit of 5.5 percent of GDP. In 1936, the presidential election year, the federal government would spend $10.2 billion, 14 percent more, and run a deficit of 6.6 percent of GDP. President Roosevelt was running for reelection and he meant to win. Roosevelt had programs for farmers, for labor, for pensioners, for veterans. He passed a Rural Electrification Act to bring power to rural areas. He had programs for building schools, swimming pools, courthouses, and libraries in every community in the country. And it seemed to be working. Within a year unemployment dropped from 22 percent to 14 percent. Just to make sure that the voters were getting the message the president advanced a plan to increase taxes on savings and undistributed corporate earnings, and sent form ISC9 to every voter to remind them that they "would have something to live on" after they were too old to work. The president was stringing the sinews of patronage that would bind working Americans to the Democratic Party for the next 45 years.
In the presidential election campaign, President Roosevelt swept the election in a landslide of 46 states to 2 and a popular vote of 61 to 37 percent over Kansas Governor Alf Landon. In the Senate elections the Democrats picked up 5 net seats, and in the House elections an additional 12 seats. In the new 75th Congress the Democrats reached a high water mark, controlling the Senate with 76-16 seats, and in the House with 334-88 seats.
The year of 1937 was the year that the New Deal chickens came home to roost. Rapid unionization courtesy of the Wagner Act was raising the cost of labor in an economy swimming in surplus labor. In the first six months of 1937 wages had risen 11 percent. In the steel industry wages went up 33 percent. And higher wages without higher output hurt company profits. Then there was the new tax on wages mandated by the Social Security Act of 1935 that employers and workers started paying in 1937. The Undistributed Profits Tax of 1936 was biting business, and companies were laying off employees. A new concern about balancing the federal budget meant cutting the federal budget from $10.5 billion to $8.6 billion and an end to the vote-buying programs like the Public Works Administration and the Works Progress Administration. The crash when it came was more severe than in 1929. The Dow Jones Industrials collapsed from 190 in August to a low of 114 on November 24. At the end of the year Harold L. Ickes asserted that sixty families who ran the nation were on strike against the rest of the country.
The economic downturn that began in mid 1937 had ballooned unemployment from 14 percent in 1937 to 20 percent in 1938. In the spring President Roosevelt proposed a new $5 billion program of government spending to reverse the decline. The recession bottomed out at that moment and output increased 58 percent by 1940. He also appointed Thurman Arnold as Assistant Attorney General in charge of the anti-trust division of the Justice Department on the theory that the Great Depression was a consequence of monopoly power. A Civil Aeronautics Act established the Civil Aeronautics Authority with the power to regulate airline routes and fares. In June the Congress passed and the president signed the Fair Labor Standards Act of 1938 that established a minimum wage of 40 cents an hour, a forty hour week, and time-and-a-half for overtime, and banned most employment of children.
In the off-year elections of the Roosevelt second term the president's party suffered its first losses since 1928. In the Senate elections the Democrats lost 6 seats to the Republicans. In the House elections the Democrats lost 72 seats, the Republicans gained 81 seats, and the Progressive Party lost 6 seats. In the 76th Congress the Democrats maintained a commanding 68-23 majority in the Senate and a substantial 262-169 majority in the House.
The economic recovery that began in 1938 continued robustly in 1939 with GDP increasing by 7 percent over the year. However unemployment continued in double-digits for the entire year, and stocks, influenced perhaps by the gathering storm in Europe hardly budged by the end of the year.
Meanwhile, after the Republican surge of 1938 it was time for payback, and Congress passed the Hatch Act which forbade federal employees from engaging in political activities. The bill was sponsored by Senator Carl Hatch (D-NM) after disclosures about employees of the Works Progress Administration using their positions to win Democratic votes.
With isolationism a political factor Congress passed a Neutrality Act requiring all belligerents in the World War to pay cash for munitions (i.e., "cash and carry"). In practice this policy favored Britain and France since they had control of the oceans.
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1929-1939: A Decade that will live in stupidity.
Why Stuck on Stupid?
Seventy years ago the leaders of both US political parties turned away from the policies that had created
an economic powerhouse we call the Roaring Twenties. For ten long years Americans suffered
economic dislocations: deflation, inflation, a four-year economic contraction, endless unemployment, mindless political experiments, and
ruthless attacks on businessmen for political gain as their leaders stayed Stuck on Stupid.
Today, after a twenty-five year economic boom, Americans are once more faced with a political elite
that wants to monkey with success. It wants to raise tax rates. It wants to restrict trade.
It wants to increase government power.
Its time to look back and remind ourselves how it came to be, starting in 1929, that America
got itself Stuck on Stupid. Otherwise it could happen again.