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sense of what had happened. Despite the magnitude of the losses $50 billion wiped off the
value of stocks, equivalent to about 50 percent of GNP and the ferocity of the decline, many
papers were surprisingly sanguine, calling it the prosperity panic. The New York Evening
World even argued that the panic had only occurred because underlying conditions [had]
been so good, that speculators had an excuse for going clean crazy, creating a bubble and
thus setting the stage for it to burst.
The New York Sun made the case that the crash would have a minimal impact on the eco-
nomy, that Main Street could be decoupled from Wall Street. No Iowa Farmer will tear up his
mail order blank because Sears Roebuck stock slumped. No Manhattan housewife took the
kettle off the stove because Consolidated Gas went down to 100. Nobody put his car up for
the winter because General Motors sold 40 points below the year s high.
Indeed, BusinessWeek, which had been one of the most vocal critics of the speculation on
the way up, went one step further, insisting that the economy would be in even better shape
now that the distracting bubble had burst. For six years, American business has been divert-
ing a substantial part of its attention, its energies and its resources on the speculative game. .
. . Now that irrelevant, alien, and hazardous adventure is over. Business has come home
again, back to its job, providentially unscathed, sound in wind and limb, financially stronger
than ever before.
The consensus, however, was that the crash would cause a transitory and mild business
recession, particularly in luxury goods. B. C. Forbes, founder of Forbes magazine, thought
that just as the stock market profits stimulated the buying of all kinds of comforts and luxur-
ies, so will the stock market losses inevitably have an opposite effect.
The immediate impact on the United States in fact proved to be much greater that anyone
expected. Industrial production fell 5 percent in October and another 5 percent in November.
Unemployment, which during the summer of 1929 had hovered at around 1.5 million, 3 per-
cent of the workforce, shot up to close to 3 million by the spring of 1930. The country had be-
come so emotionally invested in the vagaries of Wall Street that the psychological impact of
the collapse turned out to be profound, particularly in consumer demand for expensive goods:
the automobiles, radios, refrigerators, and other new products that had been at the heart of
the boom. Car registrations across the country plummeted by 25 percent and radio sales in
New York were said to have fallen by half.
The editor of the Economist, Francis Hirst, who had fallen ill on a trip to the United States
and was convalescing in Atlantic City at year s end, captured the mood. Rich people who
have not sold their stocks feel much poorer. . . . The first result therefore, has been a heavy
decline in luxury buying of all sorts and also a large amount of selling of such things as motor
cars and fur coats, which can now be bought secondhand at surprisingly low prices. The
favored health resorts have suffered enormously . . . a very great number of servants, includ-
ing butlers and chauffeurs, have been dismissed.
Immediately after the crash, Hoover, who liked nothing better than emergencies, threw
himself into action. He was one of the hardest-working presidents in the history of the office,
at his desk by 8:30 a.m and still there into the early hours of the next morning. Within a
month, his administration had pushed through an expansion in public works construction and
submitted a proposal to Congress to cut the income tax rate by a flat 1.0 percent. The federal
government, however, was then tiny total expenditures amounted to $2.5 billion, only 2.5
percent of GDP and the effect of the fiscal measures was to inject barely a few hundred mil-
lion dollars, less than 0.5 of 1.0 percent of GDP into the economy.
Hoover had, therefore, to content himself with playing the part of chief economic cheer-
leader. Unfortunately, it was a role for which he was poorly suited. Shy, insecure, and stiff, he
was ill at ease with people and surrounded himself with yes-men. He was also
constitutionally gloomy, according to William Allen White, a congenital pessimist who al-
ways saw the doleful side of any situation. Unable to inspire confidence or optimism, he re-
sorted, according to the Nation magazine, to trying to conjure up the genie of prosperity by
invocations that things were about to get better.
On December 14, 1929, barely six weeks after the crash, he declared that the volume of
shopping indicated that country was back to normal. On March 7, 1930, he predicted that
the worst effects would be over during the next sixty days. Sixty days later he announced,
We have passed the worst.
To some degree he was caught in a dilemma that all political leaders face when they pro-
nounce upon the economic situation. What they have to say about the economy affects its
outcome an analogue to Heisenberg s principle. As a consequence, they have little choice
but to restrict themselves to making fatuously positive statements which should never be
taken seriously as forecasts.
The task of trying to talk the economy up was complicated by the fact that it did not go
down in a straight line. At several points along the way it seemed to stabilize. After falling in
the last few months of 1929, it found a footing in the early months of 1930. The stock market
even rallied back above 290, a rebound of 20 percent. And the Harvard Economic Society,
which was one of the few outfits to have predicted the recession, now argued that the worst
had passed. Clutching at whatever straws he could find, Hoover seized upon these brief inter-
ludes of good news, not realizing they were head fakes. In June 1930, when a delegation
from the National Catholic Welfare Council came to see him to request an expansion in public
works programs, he announced, Gentlemen, you have come sixty days too late. The depres-
sion is over. That very month the economy began another down leg.
Eventually, when the facts refused to obey Hoover s forecasts, he started to make them
up. He frequently claimed in press conferences that employment was on the rise when clearly
it was not. The Census Bureau and the Labor Department, which were responsible for data
on unemployment, found themselves under constant pressure to fudge their numbers. One
expert quit in disgust over attempts by the administration to fix the figures. Finally, even the
chief of the Bureau of Labor Statistics was forced into retirement when he publicly disagreed
with the administration s official statements on unemployment.
In contrast to Hoover, Treasury Secretary Mellon refused even to make a show of joining
the cheerleading. His view was that speculators who had lost money deserved it and should
pay for their reckless behavior; the U.S. economy was fundamentally sound and would re-
bound of its own accord. In the meantime, he argued that the best policy was to liquidate
labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rotten-
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