Although the Prohibition controversy was absorbing, public interest in the first year of the Hoover administration became diverted by an event that shook the very economic foundations of the nation, namely, the stock market panic of 1929. The United States had enjoyed a boom after World War I, in which wages were high and production and consumption increased. During this period many had developed a tendency to invest savings and earnings in speculative ventures, particularly the buying of stocks on margin-putting up as little as 3 percent of a stock’s price in cash and borrowing the remainder from the broker.
The booming demand for stocks and the prosperous state of the nation as a whole led to a general rise in the prices of securities, which in turn led to increased investments in them. The rise in stock prices reached its height in the so-called Hoover bull market during the first six months of the Hoover administration. In this period, individuals invested billions of dollars in the stock market, obtaining the money for such investments by borrowing from banks, mortgaging homes, and selling sound government securities, such as Liberty Bonds.
In August 1929 stockbrokers were carrying on margin for their clients approximately 300 million shares of stock. By October 1929 the feverish wave of buying had exhausted itself and gave way to an equally feverish wave of selling. Prices dropped precipitously, and thousands of people lost all they had invested. This collapse frequently meant complete financial ruin. On October 29 the New York Stock Exchange, the largest in the world, had its worst day of panic selling. By the end of the year declines in stock values reached $15 billion.
The Great Depression The stock market panic preceded an economic depression that not only spread over the United States but in the early 1930s became worldwide. In the United States, despite the optimistic statements of President Hoover and his secretary of the treasury, Andrew W. Mellon, that business was fundamentally sound and that a new era of prosperity was just about to begin, many factories closed, unemployment steadily increased, banks failed in growing numbers, and the prices of commodities steadily fell.
The administration began to take steps to combat the crisis. Among the measures taken were the granting of emergency appropriations for farm relief and public works, modification of the rules of the Federal Reserve System to make it easier for people in business and farming to obtain credit, and the establishment of the Reconstruction Finance Corporation (RFC), with assets of $2 billion, to make emergency loans to industries, railroads, insurance companies, and banks.
Nevertheless, the economic depression steadily worsened during the remainder of the Hoover administration. By 1932 hundreds of banks had failed, hundreds of mills and factories had closed, mortgages on farms and houses were being foreclosed in large numbers, and more than 10 million workers were unemployed. The presidential campaign of 1932, in which the Democratic candidate was Franklin D. Roosevelt, was waged on the issues of Prohibition and the economic crisis.
The Democratic platform called for outright repeal of the 18th Amendment and promised a new deal in economic and social matters to bring about recovery from the depression. The Republicans did not call for outright repeal of the amendment. In regard to the depression, they warned against the danger to business and the national finances if the social and economic philosophies of the Democrats were substituted for the sound and conservative ideas of the Hoover administration. The Democrats won an overwhelming success in the election, carrying all but six states.