Chapter 24: The Crash, the Depression, and the New Deal

TIMELINE

1928	Herbert Hoover elected president
1929	The Great Depression begins
1932	Reconstruction Finance Corporation established  •  Norris–La Guardia Anti-Injunction Act passed  •  Franklin D Roosevelt elected president
1933	Bank holiday declared  •  New Deal programs begin  •  Agricultural Adjustment Act passed  •  Banking Act (Glass-Steagall) enacted  •  Federal Deposit Insurance Corporation established  •  Federal Emergency Relief Administration established  •  National Industrial Recovery Act passed  •  Civilian Conservation Corps forms
1935	Social Security Act passed  •  National Labor Relations Act passed  •  National Industrial Recovery Act declared unconstitutional  •  Emergency Relief Appropriations Act passed  •  Works Progress Administration formed
1936	FDR elected to second term as president  •  AAA declared unconstitutional  •  FDR attempts his Court Packing Scheme
1937	Farm Security Administration established
1938	Fair Labor Standards Act passed
1940	FDR elected to an unprecedented third term as president

IMPORTANT PEOPLE, PLACES, EVENTS, AND CONCEPTS

alphabet agencies

Herbert Hoover

Reconstruction Finance Corporation

yellow-dog contracts

bank holiday

National Industrial Recovery Act (NIRA)

Franklin D. Roosevelt

Black Tuesday

New Deal

Social Security Act

Bonus Army

Norris-La Guardia Anti-Injunction Act

“trickle down” theory

“… Let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

—Franklin D. Roosevelt, First Inaugural Address, March 4, 1933

INTRODUCTION

With the nation in the throes of the worst depression in history, Franklin D. Roosevelt assumed the presidency of the United States, bringing hope and reassurance to a frightened populace. Taking immediate action by declaring a bank holiday, Roosevelt went on to change the very fabric of how government relates to those being governed. To some, FDR was a savior, while others preferred to have the government remain at a distance from the lives of the people. FDR’s New Deal brought relief to some but remained limited in its effectiveness.

CAUSES OF THE DEPRESSION

In November of 1928, Herbert Hoover stated that the nation was “… nearer to the final triumph over poverty than ever before in the history of any land.” Ironically, less than a year later, the United States was plunged into a depression in which the unemployment rate almost reached 25 percent.

Throughout the 1920s, the country enjoyed a period of prosperity. Businesses were expanding, unemployment was low, the workweek was reduced from 60 hours to 44 hours, real income increased by 10 percent, and there was a great deal of investing in the stock market. Even life expectancy increased.

On October 29, 1929, known as Black Tuesday, the stock market crashed. In effect, the value of the companies in which people had invested by purchasing a share of stock (ownership in the company) declined sharply. This caused a great many people to lose their fortunes. Banks failed, the amount of money in circulation declined, and millions were unemployed.

The causes of the Great Depression were many. They included the following:

•  Overproduction and underconsumption: There were too many goods being produced and not enough people buying the goods. Farmers, in particular, had not enjoyed the prosperity of the 1920s. After World War I, the demand for farm products decreased, while the supply remained the same. Prices for farm products fell, forcing many off their land and into tenant farming.

•  Speculation rampant: People and banks had invested in companies whose earning power was questionable. Many of these were bogus companies. Speculation resulted in the overpricing of stocks, leading to the collapse of the stock market.

•  Margin buying: This had substantially increased, particularly in the area of stock purchases. People were permitted to buy stocks on margin; they paid for only part of the stock, planning to pay the remainder when the price of the stock increased. However, when the stock prices dropped, people were called upon to pay the balance of the stock cost that they owed, and they simply didn’t have the money.

•  Unsound bank practices: These led to the closure of many banks, with a tremendous loss of money to the depositors.

•  New methods of production: These caused technological unemployment: People lost their jobs when machines did the work they used to do.

•  High tariffs: These made U.S. products unwelcome abroad.

•  The severe depression in Europe: This decreased the demand for American goods abroad.

Although depressions had occurred before in America’s history, the magnitude of the Depression of 1929 shocked the American people. Hoover’s reaction to it cost him the election of 1932.

HOOVER’S RESPONSE TO THE CRISIS

By 1932, Herbert Hoover was leading a nation crippled by the Depression. “Hoovervilles,” communities of people living together in vacant lots, sprung up throughout the country. A staunch advocate of free enterprise, Hoover believed that when business was successful, wealth would “trickle down” to individual workers. In addition, Hoover was a believer in rugged individualism, the idea that individuals have the ability to improve their lives with little interference from the government. Hoover, therefore, was reluctant at first to interfere with the problems created by the Depression, and many felt he was not making any attempt to meet the challenges presented by the Depression. He did take action; however, it was too little, too late.

Hoover’s first step was to give aid to the railroads, banks, and rural credit corporations with the hope that these industries would recover and relieve unemployment. This kind of government involvement was a new step for the United States. Congress also voted huge sums of money to be used for public works. Hoover Dam on the Colorado River was built as a result.

In 1932, at Hoover’s request, Congress established the Reconstruction Finance Corporation (RFC), which gave loans to businesses, states, and local governments. Also that same year, the Norris–La Guardia Anti-Injunction Act was passed, ending yellow-dog contracts (those contracts that employees were made to sign stating they would not join a union). It also prevented the courts from issuing an injunction forbidding workers from striking, boycotting a company’s goods, or picketing.

These measures, it was hoped, would help the economy to recover and end the Depression. Although not successful, the steps taken by the Hoover administration paved the way for the more aggressive measures of the New Deal.

ROOSEVELT’S NEW DEAL

In the summer of 1932, a group of World War I veterans—the Bonus Army—marched on Washington seeking past pay owed to them by the government. Disgusted with this episode and Hoover’s perceived indifference to the plight of the people, the American people overwhelmingly elected Franklin D. Roosevelt to the presidency in November 1932.

His first action as president was to declare a bank holiday to examine bank practices before reopening the banks. He then called Congress into special session and enacted his program, called the New Deal. Based on the idea of “priming the pump,” that is, using government money to generate money, a number of government programs were established. These programs were designed to bring immediate relief to the hungry and unemployed, to assist in the recovery of businesses and individuals, and to reform the areas that had contributed to the Depression. Many government agencies and pieces of legislation emerged from the New Deal. Because each was referred to by acronym, these agencies became known as “alphabet agencies.” Many of these programs provided not only relief but also recovery and reform. They are generally divided as follows.

Relief

Federal Emergency Relief Administration (1933)—FERA gave federal money to the states and cities to feed the needy and pay for public works projects.

National Industrial Recovery Act (1933)—NIRA was designed to reduce unemployment by asking employers to spread out the work as much as possible. The National Recovery Administration asked industry to reduce competition and to regulate wages and hours. Labor was granted the right to organize and bargain collectively. The Supreme Court declared this act unconstitutional in 1935.

Public Works Administration (1933)—The PWA was established under the NIRA. Secretary of the Interior Harold Ickes distributed over $3 billion in work relief programs for roads and public buildings.

Civilian Conservation Corps (1933)—CCC provided employment for young men in the areas of forestry, flood control, and soil conservation.

Fair Labor Standards Act (1938)—This act set a minimum wage at 25 cents per hour and a workweek of 44 hours. It also outlawed labor for children under 16 years of age.

Recovery

Agricultural Adjustment Act (1933)—AAA paid farmers to reduce production and offered aid to them. It was declared unconstitutional by the Supreme Court in 1936.

The Tennessee Valley Authority (1933)—TVA examined and developed the resources in the Tennessee Valley.

Emergency Relief Appropriations Act (1935)—ERAA established work programs financed by the federal government. This included the Works Progress Administration (WPA), which employed manual laborers to build roads, bridges, and public buildings. In addition, the WPA supported the arts and literature with such projects as the Federal Writers Project, Federal Music Project, Federal Arts Project, and Federal Theater Project.

Farm Security Administration (1937)—FSA provided low-interest, long-term loans to tenant farmers to help them buy their own homes.

Reform

Banking Act of 1933 (Glass–Steagall Act)—This act provided for banking reform and set up the FDIC.

Federal Deposit Insurance Corporation (1933)—FDIC insured bank deposits up to $5,000 to encourage people to use the banks.

Security and Exchange Act (1934)—This act created the Security Exchange Commission (SEC) to police the activities of the stock market.

Social Security Act (1935)—This act provided for government payments to individuals who were unemployed, disabled, blind, or old. It also provided aid for dependent mothers and children.

National Labor Relations Act (1935)—NLRA was passed after the NIRA was declared unconstitutional. It recognized the right of labor to organize and bargain collectively, and it had the power to force unions and employers to engage in collective bargaining.

REACTION TO THE NEW DEAL

When FDR was re-elected in 1936, he believed that he had received a mandate from the people to continue the New Deal. Because some of the legislation that had been passed under the New Deal was later declared unconstitutional by the Supreme Court, FDR proposed a change to that institution. Because there were nine justices sitting on the Court and six of them were over 70 years of age, FDR asked Congress to approve legislation that would allow for the appointment of one new justice for every justice over 70. The proposal also provided that the number of justices sitting on the Court was to be limited to 15. Congress was aghast at this proposal. If this court-packing scheme had been approved, FDR would have been able to appoint six new justices, presumably ones who favored the New Deal. Despite the rejection of this scheme by Congress, no other New Deal legislation was declared unconstitutional by the Supreme Court.

In 1937, the United States suffered yet another downturn in the economy. With unemployment still very high, it was clear that the New Deal had had a limited effect. In an effort to prime the pump even more, Roosevelt suggested deficit spending to jump-start the economy. Although Congress approved limited measures, the real end to the Depression came when the United States became involved in World War II.

SUMMARY

The Depression and the New Deal resulted in a huge change in how the government functioned. The idea of rugged individualism was abandoned in favor of a fuller participation of the government in the lives of its citizens. This idea that government could give money directly to the people to improve their lives was radical and innovative.

Many were frightened by the idea of a move toward socialism, which they perceived the New Deal to be indicative of. The expansion of the role of the president—especially when FDR ran for a third term—was another cause for concern. Yet FDR gave people hope that a better day was dawning. He made people believe that the government cared about their plight, thereby diffusing any attempt to topple the government. When World War II became a reality, the country moved out of depression. Roosevelt again inspired faith and hope in the existing democracy of the United States.

•  Court packing scheme: President Roosevelt’s attempt in 1936 to push a judicial reform bill through Congress that would allow him to appoint six new Supreme Court justices sympathetic to his New Deal

•  Margin buying: This is the practice of buying stock on credit. People pay a small percentage of the price of the stock, hoping that it will go up in value and that they can use money from the sale to pay the balance they owe. This practice contributed to the stock market crash of 1929.

•  Rugged individualism: A belief in the ability of people to achieve success in difficult times by calling on their own abilities and resources without the interference of the government; Herbert Hoover subscribed to this notion; it affected the development of governmental policies during the early part of the Depression of 1929.

•  Socialism: A type of economic system in which the state controls the production and distribution of certain products that it deems necessary for the good of the people

•  Speculation: This is a term used to describe an investment made in something whose future is uncertain. It usually refers to high-risk investment with a reward that can be great—if the investment is successful. It contributed to the stock market crash of 1929.

•  Technological unemployment: The idea that machinery eliminates the need for human employment—that the development of new machine-based methods of work can lead to workers’ losing their jobs

REVIEW QUESTIONS

1.   A major cause of the Depression of 1929 was

(A)    too few dollars in circulation.

(B)    overproduction and overconsumption of goods, creating a shortage of goods.

(C)    overproduction and underconsumption of goods, causing the prices of goods to decrease.

(D)    an increase in the number of exports.

(E)    low tariffs.

2.   When Herbert Hoover was elected president in 1928, the U.S. economy appeared to be in a

(A)    depression.

(B)    recession.

(C)    period of prosperity.

(D)    recovery.

(E)    bank crisis.

3.   FDR and Herbert Hoover differed in that

(A)    FDR believed in rugged individualism, while Herbert Hoover believed that the individual was capable of raising himself/herself above the Depression.

(B)    Herbert Hoover believed that the government and the people had a duty to help those suffering from the depression, while FDR believed in laissez-faire.

(C)    FDR supported the idea of “priming the pump” with government money to end the Depression, while Herbert Hoover believed in direct relief to the people suffering from the Depression.

(D)    Herbert Hoover believed in rugged individualism, while FDR believed in “priming the pump” with government funds to end the Depression.

(E)    FDR was willing to take control of legislation to end the Depression even without the support of Congress, while Herbert Hoover believed in expanding the powers of the presidency to deal with the Depression.

4.   Franklin D. Roosevelt’s administration began with

(A)    a court-packing scheme.

(B)    an end to speculation in stocks and the stock market.

(C)    a decrease in unemployment.

(D)    the establishment of the Social Security system.

(E)    a bank holiday.

ANSWERS AND EXPLANATIONS

1.    C

The Depression of 1929 was caused by too many goods (overproduction) being available without enough people willing to buy them (underconsumption). This led to falling prices. Too many dollars in circulation leads to inflation, but there are too few dollars in circulation during a depression. Overproduction and overconsumption are mutually exclusive; that is, overconsumption would mean that people would buy all the goods being produced. If goods are being exported, then goods are being sold. This is healthy for an economy. The tariffs (taxes on imports) were high at this time, which led to other nations keeping out U.S. goods from their countries, contributing to the Depression.

2.    C

Herbert Hoover’s election occurred during a period of prosperity. That makes answers (A), (B) and (D) incorrect. There appeared to be no bank crisis at the time of Hoover’s election in 1928.

3.    D

Hoover believed that the individual was capable of great achievement and had the ability to rise above the Depression. FDR, on the other hand, believed that people needed assistance to get out of the Depression and believed that the government should prime the pump, or place dollars into the economy that would stimulate industry and create more dollars. FDR did not believe in rugged individualism, and he did not believe in laissez-faire; that is, little or no government interference in business, as demonstrated by his New Deal programs. FDR believed in pump priming, but Hoover believed that the government should not give direct relief to the people. FDR, in his first Inaugural Address, made it clear that he was going to take action whether the Congress agreed or not. Hoover was reluctant to take on greater power as president.

4.    E

The first act of the FDR administration was to declare a bank holiday. The court-packing scheme did not occur until 1936. Controls were placed on the securities market by the New Deal. Employment increased gradually due to the New Deal programs and, ultimately, World War II. The Social Security system was established, but not until 1935.