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Great Depression
Mrs. Saunders
Great Depression
The Great Depression was a period of severe
economic hardship lasting from 1929 to World
War II.
Three of the most important causes were:
– 1) Over-speculation in stocks using borrowed money
that could not be repaid when the stock market
crashed in 1929 and stock prices collapsed,
– 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.
Great Depression
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.
Great Depression
The Federal Reserve System functions as the central bank
of the United States. 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.)
Great Depression
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.
Great Depression
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.
Great Depression
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 HawleySmoot Tariff encouraged foreign countries to retaliate by
passing high tariffs of their own. This meant 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.
Great Depression
The Great Depression had a
four-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, business bankruptcies, increased unemployment, and bank closings
led to political unrest. Labor unions especially became more militant, and
some even questioned whether capitalism was the best economic system for
the United States.
• Fourth, 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.
Great Depression
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 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.”
New Deal
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.
This Clifford Berryman 1938 cartoon titled "Old Reliable" broadly
caricatured FDR's shift to Keynesian economics: "This is one rabbit
that never failed me!" remarks Roosevelt as he pulls "spending" out of
his magician's hat. Keynes' influence would reach far beyond the
Depression, providing the stimulus for much of the American economic
growth during and after the Second World War.
New Deal
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.
New Deal
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.
New Deal
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.
New Deal
Other reform programs tried to provide a
degree of financial security for the most
needy 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.
Great Depression
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 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.