[ISSN 1974-028X]








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N. 76 - Aprile 2014 (CVII)

The Great Depression of 1929
The fall of Wall Street

di Antonio Anelli


The twentieth century reveals the break-down of socio-economic equilibrium because of the great depression of 1929. In the thinking of John Maynard Keynes postulates of neoclassical theory are revealed unable to explain and solve the problems arising as a result of the Great Depression. It traces the logic sequence “manias , panics and crashes “ and the financial crisis in the real economy became soon the crisis of production and trade. Emerges , therefore , the crucial role of economic policy in the definition of tools for the growth and stability of a country.


In the U.S., during the Great War, federal spending grows rapidly until it reaches the triple tax revenues, despite the strong growth in income taxes (tax on top earners rose from 7 percent in 1913 to 77 percent in 1916). In 1920, the government embarked on a policy of severe spending cuts to ensure a balanced budget, causing a deep recession.


Unlike European countries where serious human and material losses recorded in America, the return of the soldiers, their reintegration in the labor force and the post-war industrial conversion for the production of consumer goods they quickly exit the United States from recession. The growth is driven by industry, with the automotive sector, at the top, the sectors connected to it - metallurgical, petroleum, rubber - and the construction industry.


The Twenties were characterized by strong productivity growth of 43 percent, also the result of investments developed during the war, which translates entirely in profit growth, given the slow wage growth and the low bargaining power of workers. In turn, the profit growth stimulates new investment and the expansion of production, producing new technological innovations and productivity improvements in a kind of virtuous circle in terms of entrepreneurship.


In the post-war U.S. policy, thanks to the three Republicans (Harding, Coolidge and Hoover), acts in favor of large companies, favoring the industrial sector, banking and finance. On the fiscal front, Harding (1920-1923) and Coolidge (1923-1929) dramatically reduce your income taxes, ending a period that had opened with the entry into war and characterized by a heavy tax burden, due to the extraordinary demands of financing. The maximum tax rate on income is raised to 25 per cent in 1925, on the grounds that a high tax rate on high incomes economy slows and reduces the overall tax revenue. In addition to these measures, the willingness to quickly reduce the debt incurred during the war leads to a sharp reduction in public spending (which will arrive in 1929 to 3 per cent of GDP).


In contrast, a partial balance of the fiscal policy of the central government, many local governments actively intervene, however, especially in the field of infrastructure (roads, electricity, telephone), supporting the development.


Alongside the development of the industrial sector, Harding and Coolidge favor the growth of banking, finance and insurance (many companies double and triple their size. On the monetary side, the Federal Reserve expanded credit, with a policy of low interest rates, low reserves and growth of the monetary base. The credit facility and the expansion of the real economy will also impact positively on the financial markets that make strong gains. However, because of fears of an excessive speculation at Wall Street in 1928, the Federal Reserve reverses monetary policy, by raising interest rates.


The anti-union policy that results in a strict legislation against workers contain wage and widens the measures introduced in times of war , in the name of national interests and the fight against the military intelligence.


The only workers who benefit from the productivity gains are specialized ones, with the crucial tasks in the production process. For the majority of unskilled workers increased productivity and mechanization result instead in working conditions and wages always the hardest. The miners’ union sees its membership declining from 500,000 in 1920 to 75,000 in 1928. During the same period, the American Federation of Labor drops from 5.1000000 to 3.4000000 members.


The anti-immigration policy (so-called North American isolationism) operated by the United States had as its main purpose to act in defense of national employment, Coolidge stiffens the anti-immigration policy with the Immigration Act of 1924. The law sets a limit to the migratory flows, setting a quota of new immigrants, for each country of origin, accounting for 2 percent of immigrants in America at the 1980 census. Mass immigration from Europe during the first twenty years of the century, therefore, decreases sharply. For Asians and Indians is also completely prohibited immigration. In some states are then also taken discriminatory measures of an economic nature, such as in California, where in 1913 he was introduced a rule that prevents non-American citizens to own land or rent for a period exceeding three years. Subsequently, similar laws are passed in 11 other states.


During the Twenties, the Republicans had pressed for the defense of domestic enterprises through tariffs on imported goods. In 1922, before there is a law in this direction and in the presidential campaign of 1928, Hoover insists on increasing prices for agricultural products, which , according to the presidential propaganda, would have to accompany a reduction of tariffs on industrial products. In May 1929, the House of Representatives instead approved a law raising tariffs on both agricultural products, both on the industrial ones (the law then goes to the Senate in March and became law on June 17, 1930).


In September, even before its final approval, the President Hoover receives notes of protest by leading economists and politicians and the business world (including Irving Fisher, Paul Douglas and Henry Ford) and threats of trade retaliation of 23 partners U.S. trade. In May 1930, the Canada imposes new tariffs on American and European countries are redirecting their commercial relations with new partners, with a larger overall closure in international trade.


Between 1929 and 1933, U.S. imports fall by 66 per cent and exports by 61 per cent, accompanied with a decrease of 50 per cent of GDP (total , however, in 1929 , imports up 4.2 percent of U.S. GDP and exports 5.0 percent). The policy of duties and tariffs will reverse only after the Second World War in December 1945 (following the Bretton Woods Agreement of 1944) and the establishment in 1947 of the GATT (General Agreement on Tariffs and Trade - General Agreement on Tariffs and trade) of the 1950, which then led to the creation in 1995 of the WTO (World Trade Organization - World Trade Organisation), whose main purpose is to liberalize international trade.


Overall, the Twenties are characterized by a strong growth in the real economy and, especially in recent years, the financial markets. At the social level, the jazz music, the advent of radio and the mass production of automobiles (the Ford T sells 15 million copies) radically transform society and lifestyles giving birth to the American way of life. At the same time, growing inequality and discrimination, economic and social. In 1920, approved the alcohol prohibition law, which prohibits the production, trade and import/export of alcohol, generating a large black market controlled by organized crime. In 1929, the richest 1 percent of the population owns 40 percent of the national wealth. Between 1923 and 1929, the poorest 93 percent of the population experiences a loss of 4 per cent of disposable income per capita. At the sectoral level, agriculture, textiles and energy sector are in trouble during the Twenties. Agricultural land lost between 30 and 40 percent of their value between 1920 and 1929. The share of national income accruing to farmers falls 15-9 per cent during the Twenties. In 1929, the per capita annual income of agricultural workers is $ 273, compared to the national average of 750.


In the industrial sectors, the process of mechanization expels 200,000 workers a year from the manufacturing process. More than half of Americans live below the poverty line. On the other side, people who declare an income of over $ 500,000 rose from 156 in 1920 to 1,489 in 1929, an unprecedented rate of growth, which, however, affect less than 1 percent of the national population. In this favorable climate for business, the stock market is growing at sustained rates between 1928 and 1929. The rise in share prices is also supported by the interest rates still low, the credit facility and the absence of regulations restricting the lending capacity of the banks, thereby enabling speculative operations. The growth of industrial profits, accompanied by optimistic expectations about the future performance of the economy, tends to produce a climate of euphoria in the markets, reinforced by the statements of leading economists and members of the financial and industrial sectors.


The last days of October, however, marked a sharp turnaround, etched in the memory of speculators in the Wall Street crash of October 1929, Black Tuesday. In 1925 the real estate market had reached a peak in six years and the Dow Jones industrial average fivefold increase in the value peaking September 3, 1929 at 381,27.


During September, the market is showing the first signs of weakness with a reduction of 17 per cent of the index. In October, the prices go back up to recover half of the losses. But October 24, Black Thursday (Friday for the European markets), the loss of quotations becomes more consistent, accompanied by a strong growth in the volume of trade. In a coordinated way, the biggest bankers are beginning to buy major blue chips at prices higher than the market in an attempt to reverse expectations, as they had already successfully tested during the crisis of 1907. Speakers in particular, William Durant (founder of General Motors and Chevrolet, as well as the Durant motors, the Rockefeller family and other financial and industrial giants in the hope of instilling confidence. The result, however, is only temporary.


The markets reopened October 28 (Black Monday) saw a fall of 13 per cent of the index. The next day (Black Tuesday), a new drop in prices of 12 per cent, with a record in the volumes that will be wrought only in 1968.


During Black Tuesday, the collapse of the securities is accentuated by the rumor that President Hoover would not veto the tax law proposed by Smoot and Hawley on the rise in rates.




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