The Great Depression and the New Deal

Causes of The Great Depression

Farm incomes fell throughout the 1920s with the decrease in immigration, the end of the WWI European demand, and increases in productivity which increased supply and lowered prices. Meanwhile industrial goods farmers needed increased in price and many farmers could not pay mortgages.

Easy money and prosperity of the 1920's ended in a frenzy of speculation and the stock market crash of October 24, 1929.

Overproduction led to oversupply of manufactured products and deflation.

Post-war economic disorder and dislocation of trade affected European trade and reduced American businesses’ ability to sell products overseas.

America's high tariffs stifled world trade. Foreign countries could not get dollars to buy U.S. products

Excessive borrowing and buying on credit left many people deeply in debt. Bad bank loans hurt banks and sale of valueless stock hurt investors.

The inevitable result of the business cycle: the economic boom of the 1920s led to excess production and surpluses, which led to factory slowdowns and shutdowns.

The distribution of income was unequal. The poor lacked income to buy a larger portion of the surplus. Consumers were unable to spend the economy out of the depression.

Hoover and the Depression

Hoover was an individualist who believed that the economy would cure itself and that aid and assistance for the poor were the responsibility of local and state government rather than the federal government.

Hoover believed federal aid would create a vast inefficient bureaucracy and undermine the self-respect of those receiving aid. He did not want to provide direct aid to the needy.

Hoover did respond to the collapse of business and agriculture: Hoover Dam (Boulder Dam) was intended to stimulate business and create jobs. The RFC in 1932 (Reconstruction Finance Corporation) lent money to banks, insurance companies, railroads, and farm mortgage associations in order to strengthen business. The Home Loan Bank Act of 1932 - special banks were created to provide assistance to savings banks, building and loan associations, and insurance companies which lent money on mortgages.

These new policies marked the first time that the President and Congress were accepting the idea that government had to intervene in the economy during a period of crisis.

Hoover lost to Roosevelt in 1932 because the American people believed Hoover was a cold stuffed shirt who had not done enough to help the poor and fight the depression. People blamed the depression and their suffering on Hoover. For example, the shanty towns of the depression were called Hoovervilles and the newspaper blankets were called Hoover blankets.

Roosevelt in contrast was viewed as enthusiastic and warm-hearted, ready to provide aid to those who were suffering. He inspired hope and promised action while Hoover appeared to be heartless and inactive.

The New Deal Provides Relief and Speeds Recovery

FDR took office in March 1933 at the worst period of the depression when unemployment was 25%.

"The only thing we have to fear is fear itself." This speech was an attempt to inspire people with faith in the future and calm their fears and despair during the depression when so many were suffering.

The three R's of the New Deal: Relief, Recovery, and Reform.

Roosevelt proved he was a man of action as soon as he took office. On March 5, 1933, his first full day of office he began the "New Deal" for the "forgotten man."

During the next 100 days he sent 15 messages to Congress which responded by adopting 15 relief and recovery measures.

FDR closed all banks and declared a bank holiday on March 5. Congress passed emergency banking laws: FDIC (Federal Deposit Insurance Corporation) insured deposits up to $2,500 (today $250,000).

The U.S. abandoned the gold standard to devalue the dollar. FDR hoped agricultural prices would increase, but he was disappointed.

Pump priming through the Reconstruction Finance Corporation (RFC).

The New Deal provided direct relief for the unemployed. In two years federal agencies contributed $3 billion to the states for local relief. Eight million families were on relief (there were 14 million unemployed in 1933).

Most Americans preferred to be employed. Instead of receiving government relief they wanted the government to provide jobs.

Work Relief: At first make-work projects of little value (called boondoggling by critics) 1933-34.

WPA (Works Progress Administration) 1935. In this program the federal government cooperated with state and local governments to build and repair schools, sewage plants, roads, and other public improvements. The government also paid unemployed artists, writers, musicians and actors to produce art.

Civilian Conservation Corps (CCC) provided work for 500,000 mostly unmarried young men 18-25 from poor families to do socially useful work, often living out in work camps scattered across the land in national parks and other areas.

National Youth Administration (NYA) provided work for students. New Deal programs saved thousands of young people from idleness, helped them to maintain self-respect, and kept them out of the job market so adults could find jobs more easily.

While critics argued all of these relief programs were wasteful and inefficient, supporters of the New Deal claimed that these programs had managed to keep millions from hunger and allowed them to maintain their self-respect by allowing them to work while receiving government aid. The American work ethic remained strong during the depression and most Americans preferred to work for a government wage instead of simply receiving money from the government without gainful employment attached to it.

Conservatives claimed that the New Deal expanded the role of the government far too much and claimed it moved the United States closer to socialism. They critiqued the high taxes on the richest Americans which were used to pay for many of the New Deal programs.

New Dealers were defenders of the New Deal and claimed that at time of national emergency extensive government intervention in the economy was needed. They claimed significant government spending was required according to the principles of Keynesian economics.