Download The Stock Market Crash, the Great Depression, and the New Deal

The Stock Market Crash, the Great Depression, and the New Deal
Standard VUS.10 The student will demonstrate knowledge of key domestic events of the 1920s and 1930s by
b) Assessing the causes and consequences of the stock market crash of 1929.
c) Explaining the causes of the Great Depression and its impact on the American people.
d) Describing how Franklin D. Roosevelt’s New Deal relief, recovery, and reform measures addressed the
Great Depression and expanded the government’s role in the economy.
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 United States emerged from World War I as a global power. Since American business was booming during the
early twenties, great optimism existed about the future of the American economy and a stock market boom resulted. These
factors led to an excessive (too much) expansion of credit, which in turn led to investments made with borrowed money.
Unfortunately, investment with borrowed money led to overspeculation in the stock market.
Speculation is the act of buying something at a low price in the hope of reselling it later at a profit. One way people
make money off stocks is through speculation. They buy them at one price. Then when the stock’s price goes up, they sell their
stock at a profit. Between 1920 and 1929 prices on the New York Stock Exchange, the nation’s largest stock market, steadily
increased. As a result, stock market speculators became very wealthy. Many of them realized if they borrowed money, then
they could buy even more stock. After these investors sold their stock, they could repay their loans and still clear larger profits.
This practice of buying stock on credit was called buying stock on margin. Margin buying led to overspeculation in the stock
market. When the market dropped, investors who had bought stock on credit found themselves in a difficult position. The
terms of their loans allowed their creditors to demand enough money to cover the stock’s original value. This forced investors
to sell even more stock, which caused stock prices to drop even further. This downward cycle continued until the New York
Stock Exchange crashed, and stock prices completely collapsed.
The 1929 stock market crash had several causes. Overspeculation fueled by the excessive expansion of credit was one
cause. Second, business failures led to bankruptcies. Third, since bank deposits were often invested in the stock market, the
banks had no money, when the market collapsed. When businesses failed, the stocks lost their value, prices fell, production
slowed, banks collapsed, and unemployment became widespread. As a consequence of the stock market crash, clients
panicked, attempting to withdraw their money from the banks, but there was nothing to give them. No new investments
occurred, and business plummeted (nose-dived). This downward business cycle 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.
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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
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 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. FDR communicated his ideas about the New Deal to the
American people through “Fireside Chats” or radio talks. Roosevelt used these radio talks to reassure and inform the American
people during the Great Depression and later throughout World War II. 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.
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