[Global Financial History] The Era of Abundance, Shadows of the Great Depression Looming Over the US Economy

After World War I ended in 1918,
rapid growth driven by the automobile industry
New York Stock Exchange reached top global status
Dow Jones hit 381.17 on September 3, 1929
Record remained unbroken for 25 years thereafter

On November 11, 1918, World War I finally came to an end. John Pierpont Morgan Jr. facilitated loans to France, Britain, and Russia during the war. He organized a cooperative loan syndicate from 2,200 banks and arranged $500 million in loans to Britain and France. He also participated in postwar finance, raising $1.7 billion in German war reparations. The New York Stock Exchange rose to the top position globally. The American economy, which had developed dramatically over about 40 years until the 1920s, stood tall as a capital-exporting country lending money to Europe, and technology advanced rapidly through the war. The sudden end of the war after the victory in World War I could have caused serious problems for American companies. Industrial facilities that had invested huge funds to meet wartime demand could have become useless. The sudden drop in demand actually triggered a short but severe recession in the early 1920s.

However, the American economy quickly recovered, and from 1921 to 1929, national income grew at an average annual rate of about 3.7%. Like the railroads in the 19th century, the growth engine of the early 20th-century American economy was the automobile. In 1914, the number of automobiles in the U.S. was approximately 1.26 million. By 1929, the American automobile industry produced 5.6 million vehicles. Related industries such as petroleum, steel, and rubber also developed. Highways were built, and related sectors like automobile repair grew rapidly. Electricity was distributed, and washing machines, automobiles, and radios became popular. The manufacturing sector's share increased, and labor productivity rose rapidly. Stock prices also rose accordingly. In short, it was an era of prosperity. However, rural America did not enjoy the atmosphere of boom. One-third of the rural population made a living by cultivating alfalfa, which was feed for horses, an important means of transportation at the time. But as the number of horses decreased due to the emergence of automobiles, their income plummeted. Farmers switched to wheat production and were able to export wheat to Europe during World War I. After the war ended in 1918, exports sharply declined, and farm incomes actually decreased. Consequently, banks and stores in rural areas also faced difficulties. Due to Thomas Jefferson's opposition to the establishment of a central bank, the U.S. had many small banks compared to other countries.

In 1921, among approximately 3,000 banks across the U.S., about 500 banks went bankrupt every year in a domino effect. Wall Street, which dealt only with the "industrialized America," failed to notice this chronic illness of the rural economy. The American economy and stock market enjoyed a super boom in the 1920s. Moreover, consumer credit, especially installment buying, became commonplace, increasing mass consumption. Americans who had invested in U.S. government bonds issued during World War I had tasted capitalist finance. These middle-class investors immersed themselves in securities investment and did not hesitate to borrow for investment. However, by 1928, the American economy was gradually slowing down. The Wall Street stock market was still rising alone, detached from the real economy.

Since 1870, various reforms had been enacted, but few cases prioritized insiders' interests as much as the New York Stock Exchange. Speculators colluded and manipulated stock prices artificially using elusive methods. Despite the prohibition of fictitious orders, operators cleverly timed trades as prearranged to manipulate prices. They distorted stock price trends, then used short selling or concentrated selling to trap ordinary investors and sell their holdings for huge profits. As stock speculation overheated, the Federal Reserve Board raised the discount rate and suppressed monetary expansion. This immediately affected not only Wall Street but also the real economy. The economy began to cool in early 1929. Usually, economic cooling appears as a stock market decline. However, Wall Street was moving differently from the real economy.

To prevent catastrophe, the Federal Reserve Board needed to take swift action. But, as fate would have it, the Federal Reserve Bank chairman at the time, Strong, died after undergoing surgery to remove tuberculosis. The Federal Reserve Board, having lost its helmsman, could do nothing in the critical moment. Driven by the greed of ordinary investors seeking quick riches, Wall Street stock prices surged again. On September 3, 1929, the Dow Jones Index reached 381.17. The U.S. stock market did not surpass this level for the next 25 years. However, after the Labor Day holiday in September 1929, the stock market suddenly crashed. Thereafter, stock prices sometimes plunged sharply and sometimes declined slightly, showing a continuous downward trend. Wall Street anticipated the possibility of future price declines with the ambiguous term "technical adjustment."

On October 22, even AT&T, one of the most stable stocks on the exchange, plunged. On October 24, 1929, the fateful day that could no longer be denied arrived. Overnight, sell orders piled up at securities firms on Wall Street. The stock market crash in New York ended around June 1930. After June, the U.S. plunged into a more severe economic depression. President Hoover was inevitably held responsible for the economic depression. During his election campaign, Hoover promised to protect American farms by raising tariffs on agricultural imports, and tariffs on agricultural and industrial products were sharply increased. As the U.S. raised tariffs, other countries also raised theirs, shrinking U.S. exports and the scale of global trade. Moreover, facing economic recession, the Federal Reserve Board insisted on raising interest rates and tightening money supply. These policies destroyed the American economy amid the worst economic depression. About 9,800 banks closed, and millions of depositors went bankrupt. Federal Reserve Banks prohibited secured loans, so even sound banks could not avoid bankruptcy. Meanwhile, President Hoover passed the highest tax increase bill in U.S. history in 1932.

By 1929, the U.S. total production had halved, and unemployment hovered above 25%. Hoover, blindly devoted to fiscal balance, aimed for fiscal equilibrium. In 1932, he submitted and passed the highest tax increase bill in U.S. history. Compared to the 1929 peak, the U.S. gross national product halved by 1932. Unemployment exceeded 25%. U.S. Treasury bond yields turned negative. The American economy was plunging into an endless abyss. The New York Stock Exchange membership price plummeted from $500,000 to just $70,000. The Great Depression awaited President Roosevelt.

Baek Youngran, Representative of History Journal