Download VUS.10 c and d – The Great Depression, and the New Deal The

VUS.10 c and d – The Great Depression, and the New Deal
The Great Depression was a period of severe economic hardship lasting from 1929 to World War II. A combination of
factors caused the Great Depression. Three of the most important causes were: 1) the 1929 stock market crash and the
resulting collapse in stock prices, 2) the Federal Reserve’s failure to prevent widespread collapse of the nation’s banking
system in the late 1920s and early 1930s, leading to severe contraction in the nation’s supply of money in circulation, 3) High
protective tariffs like the Hawley-Smoot Act (Tariff Act of 1930) that produced retaliatory tariffs in other countries, which
strangled world trade.
The downward business cycle that occurred during the Great Depression occurred despite the preventive actions taken
by the Federal Reserve System. The Federal Reserve System functions as the central bank of the United States. The Federal
Reserve Act created the Federal Reserve Bank system in 1913. This law divided the United States into twelve Federal Reserve
districts, each of which possesses a Federal Reserve Bank. A Federal Reserve Bank is a banker’s bank. Only banks can have
accounts at a Federal Reserve Bank. If a bank needs to borrow money, it may do so from the Federal Reserve Bank.
However, a bank must pay interest on its loans from the Federal Reserve, just as individuals must pay interest if they borrow
money from a bank. The Federal Reserve Board, appointed by the President of the United States, oversees the actions of the
Federal Reserve Banks and sets the interest rate which banks must pay to borrow money from the Fed. The Federal Reserve’s
power to set interest rates enables it to control the nation’s money supply. If the Federal Reserve Board believes the American
economy is slowing down, it will cut interest rates and thereby encourage borrowing. On the other hand, if the Federal Reserve
Board believes the economy is overheating and thereby causing inflation, then it will raise interest rates. (Inflation means
prices increase, and the dollar buys less.)
When the stock market crashed in 1929, the Federal Reserve Board was unable to prevent it from triggering the Great
Depression. During the twenties, many banks had invested their savings deposits in the stock market. They had also loaned
money to speculators who were buying stock on credit. When the market crashed, these individuals could not cover their
loans. As a result, the banks lost the money, which they had loaned for stock speculation. Although the Federal Reserve Board
had recognized in the late twenties that speculation was out of control and had tried to adjust interest rates accordingly, it could
not protect individual banks from their unsound loan policies. Once banks began to fail, Americans began to lose confidence
in the nation’s entire banking system. Thousands of Americans rushed to withdraw their savings from the banks, before they
closed. This action placed even more pressure on the nation’s banks. As a result, during the first three years of the Great
Depression, five thousand banks failed and nine million Americans lost their savings accounts. The Federal Reserve’s failure
to prevent widespread collapse of the nation’s banking system in the late 1920s and early 1930s led to a severe contraction
(reduction) in the nation’s supply of money in circulation.
High protective tariffs also helped cause the Great Depression. A protective tariff is a tax on imports that is so high
that Americans cannot afford to buy foreign goods. After the 1929 stock market crash, Congress attempted to help American
business by passing the Tariff Act of 1930, which was popularly called the Hawley-Smoot Tariff. Since the Hawley-Smoot
Tariff was a protective tariff that set the highest tariff rates in American history, historians now believe it actually had the
opposite effect from what Congress intended. Instead of helping business by encouraging Americans to buy American-made
goods, the Hawley-Smoot Tariff encouraged foreign countries to retaliate (strike back) by passing high tariffs of their own.
This meant that foreigners could not afford to buy American goods. In short, the erection of tariff barriers by all of the world’s
major industrial powers strangled world trade. This decrease in world trade deepened the worldwide depression.
The Great Depression caused widespread hardships in the United States. It had a five-pronged effect on the United
States. First, unemployment skyrocketed and homelessness increased. By 1932 twelve million Americans were out of work,
and the unemployment rate stood at twenty-five percent of the American work force. Second, bank closings led to a near
collapse of the nation’s financial system. Third, the demand for goods declined. As people became unemployed, they had less
money to spend, which resulted in a sharp decline in the demand for goods and services. Fourth, business bankruptcies,
increased unemployment, and bank closings led to political unrest. Labor unions especially became more militant
(confrontational), and some even questioned whether capitalism was the best economic system for the United States. Fifth, as
the Great Depression worsened, banks foreclosed on thousands of farms. These farm foreclosures caused thousands of farm
families to migrate (move away) from the lands of their birth. They traveled in search of jobs, which often did not exist.
Most Americans blamed President Herbert Hoover, a Republican, for the terrible conditions of the Great Depression.
Consequently, in the presidential election of 1932 the Democrat candidate Franklin Delano Roosevelt (FDR) overwhelmingly
defeated President Hoover’s bid for re-election. At his inauguration, Roosevelt tried to rally the American people by telling
them, “This is pre-eminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly
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facing conditions in our country today. This great nation will endure as it has endured, will revive and will prosper. So first of
all let me assert by firm belief that the only thing we have to fear is fear itself.”
President Roosevelt offered a “New Deal” for the American people. The New Deal was FDR’s program to end the
Great Depression. This program changed the role of the government to a more active participant in solving the nation’s
problems. The power of the federal government increased, and Americans came to expect the federal government to take
responsibility for bringing prosperity to the American economy. The New Deal followed a three-pronged strategy, often called
the “three R’s.” These three R’s were relief, recovery and reform.
Relief programs tried to ease the suffering of the unemployed. Relief measures, like the Works Progress
Administration (WPA), provided direct payments to people for immediate help. Many of these were public works programs.
Public works are construction projects that benefit the whole society, like highways, bridges, schools, post offices, and parks.
The federal government hired unemployed Americans who could not find jobs. Recovery programs aimed to bring about the
recovery of business in all areas of the American economy. They were designed to bring the nation out of depression over
time. For example, the Agricultural Adjustment Administration (AAA) tried to help farmers recover from the depression by
limiting agricultural production and thereby raising livestock and crop prices.
Reform programs attempted to bring about change for the better in American society. Some reform programs tried to
help prevent future economic crises, by correcting unsound banking and investment practices. One program in this category
was the Federal Deposit Insurance Corporation (FDIC), which protects the money of depositors in insured banks. Other reform
programs tried to provide a degree of financial security for the neediest Americans. For example, the Social Security Act
offered safeguards for workers, including unemployment insurance and retirement benefits. Americans came to believe that
American society should use the federal government to provide care for those Americans, who through no fault of their own
could not take care of themselves.
Although the Great Depression did not end until World War II, the New Deal provided hope for millions of Americans
during one of the most difficult decades in American history. The New Deal also had lasting results. It permanently changed
the role of the American government in the economy. The New Deal also fostered (encouraged) changes in people’s attitudes
toward government’s responsibilities. Organized labor (unions) acquired new rights, like the right to form a union, the right to
strike, and minimum wage. Finally, the New Deal set in place federal legislation that reshaped modern American capitalism.
In short, the legacy (lasting effect) of the New Deal influenced the public’s belief in the responsibility of government to deliver
public services, to intervene (get involved) in the economy, and to act in ways that promote the general welfare.
QUESTIONS:
1. What was the Great Depression?
2. What were the three causes of the Great Depression?
3. What is the Federal Reserve?
4. How does the law divide the country in regard to the Federal Reserve?
5. What does the Federal Reserve do?
6. During the 20’s, what did many banks do with their savings?
7. When people could not cover their loans, how did that affect banks?
8. As banks ran out of money, what did many people attempt to do quickly, leaving the banks with no money?
9. What did Congress try to do to help American business?
10. The purpose of the measure Congress passed was the encourage Americans to buy what type of goods?
11. What did other countries do to retaliate against the measure passed in #9?
12. Which so many countries passing tariffs to protect their goods, what affect did that have on world trade?
13. What were the five effects of the Great Depression in America?
14. Who was elected President in 1932?
15. What did the new president have to say about fear?
16. How did the New Deal change the role of government?
17. What were the three “R’s” of the New Deal?
18. What was the purpose of Relief programs?
19. What was the purpose of Recovery programs?
20. What was the purpose of Reform programs?
21. What was the WPA and what was it’s purpose?
22. What was the AAA and who was it designed to help?
23. What was/is the FDIC and what is it designed to do?
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