US History Chapter 23

“If the decade of the 1920s was the party…”

“… the 1930s was the hangover”

The most obvious sign of an impending economic crisis was…

the stock market crash in October 1929

When stock prices fell, loans could not be repaid, triggering a chain reaction…

• thousands of banks failed

• millions of depositors lost their savings

• factories shut down

• unemployment increased to historic levels

• confidence in American economy plumeted

Possible reason for the Great Depression:

Inequitable Income Distribution

• While worker productivity doubled in the 1920s, wages fell

• By 1929, 0.1% of Americans controlled 34% of all savings, and 80% had no savings at all

• Most families lived below the poverty line

Possible reason for the Great Depression:

Over Speculation in the Stock Market

• Buying stocks on margin created over-speculation in the stock market

• Buying on margin involved borrowing from the stockbroker who sold the stock

• Leveraging: anyone could purchase as many shares for a fraction of their worth

• Cover the margin: if stock prices fell, the buyer would have to sell out and pay what was owed. If a buyer could not pay the total amount owed, then the stockbroker took ownership of the stock

• When the price of all stocks kept falling, no buyers were left to support prices, and the stock market crashed

Buying stocks on the margin creates a “bubble”…

Throughout the 1920s, more and more people bought stocks on the margin…

When rising stock prices far exceed their actual financial value

creating a larger and larger bubble of overvalued stocks

Wild up and down fluctuations in the stock market are drive by…

greed and fear

When prices keep going up for a sustained period, driving stocks beyond their value, it is caused by buyer greed. When prices continually decline way below their actual value, seller fear is to blame

When people kept selling what they owned out of fear of losing everything, the “Great Bull Market” of the 1920s became…

The “Great Bear Market” of the 1930s

Who was the personification of the era’s greed? Why?

Carlos Ponzi

“Ponzi Scheme” — he promised to double anyone’s investment in 90 days. When Ponzi paid off a few old investors, word-of-mouth caused hosts of new investors to jump in. Ponzi was able to pay off a few early investors and pocket the rest.

Possible reason for the Great Depression:

Bank Panic and Business Contraction

• When the stock market crashed, banks that had invested in the stock market panicked when they suffered severe losses

• “Run on the Banks” — people rushed to get their money out before it was too late

• When everyone showed up at once, the bank’s cash reserves ran out

• Banks could no longer make loans to businesses, causing the overall economy to contract (decline)

Possible reason for the Great Depression:

Consumer Debt

• Because people were more used to buying on credit, they carried significant debt for loans to buy cars, appliances, homes, etc…

• Consumers cut back on spending when they felt the pressure to repay loans, causing a drop in consumer spending and a rise in layoffs

Possible reason for the Great Depression:

Deflation

• When there are too many goods, demand diminishes, and prices fall (deflation)

• Ex: Farmers produced more food than the nation could consume, but people could not afford to buy it

• “Amid plenty, people starved”

Possible reason for the Great Depression:

Government Tariff Policy

• In 1930, Congress passed the Hawley-Smoot Tariff, believing high tariffs on imported goods would help protect the American economy

• This led to retaliation from traditional trading nations, slowing down the economy

• The Great Depression was now worldwide 

Possible reason for the Great Depression:

Federal Reserve Policies

• The Fed raised interest rates

• This hampered borrowing money: consumers could not repay loans, and businesses did not have the capital to finance operations

• Intensified deflation

• The Fed passively stood by and let banks fail

• Key reason for the Great Depression’s stubborn longevity

Possible reason for the Great Depression:

Economic Cycles

• The Hoover Administration believed the Fed should stand aside and allow troubled banks to fail

• Suggested that the economy would eventually and inevitably begin to grow again

Who was blamed for the Great Depression?

When he came into office, unemployment was…? When he left office, unemployment was…?

President Herbert Hoover

4.4% … 25%

To the public, Hoover seemed insensitive to the growing plight of millions; he believed poverty and unemployment were best left to “voluntarism,” meaning…

The voluntary cooperation of individuals, private charities, churches, and local governments working together to alleviate suffering for the poor

Hoover strongly believed that ________ __________ was the American bedrock of “self-government by the people outside of the Government.”

voluntary cooperation

At the time, why did the relief burden fall upon state and municipal governments working in cooperation with private charities like the Red Cross?

Because at the time, the US had no federal system of unemployment benefits

When the resources of local governments and private charities ran out, Hoover…

Why?

resisted requests for direct federal relief.

He feared that too much intervention would destroy American self-reliance, which he considered fundamental to the American character.

Hoover insisted that large-scale federal relief programs would cause recipients to become…

permanently dependent on the government — he felt his was un-American

Reconstruction Finance Corporation (RFC)

Provided government loans to railroads and banks to keep them afloat. Also helped fund public works programs to create employment and established the first federally-supported housing projects

Hoover’s unpopularity was due to his…

adherence to traditional remedies, limited government, self-sufficient individualism, stress of voluntarism, and reliance on economic cycles running their course

Hoover failed to grasp that the country had fundamentally changed. The nation’s transformation to a modern urban-industrial society caused most americans to switch from independent producers to …

dependent consumers

The Democratic Party took full political advantage of the situation, accusing Hoover and the Republicans…

Accusing them of causing the depression, blaming Republican pro-business policies

Anger directed at who finally united the rural and urban wings of the Democratic Party?

Anger at Hoover, the Republican Party, and business people

In 1932, the Democratic Party nominated…

Franklin D. Roosevelt

FDR’s New Deal would be a combination of…

Progressivism and WWI national mobilization by the federal government

FDR based his presidential campaign on…

On optimism and restoring national confidence

“We have nothing to fear but fear itself”

FDR’s first order of business as president involved… How?…

Restoring confidence in the financial system

• Closed the nation’s banks for four days, declaring a “bank holiday”

• Federal auditors examined the books of the closed banks; some were deemed sound and reopened, and some were deemed insolvent and were left closed

How did FDR use the bully pulpit of the presidency?

Went on the radio to directly inform the public of what was happening. He explained how the banking system worked and why his actions were necessary.

“Fireside Chats”

The Banking Act of 1933

Created a new government agency, the Federal Deposit Insurance Corporation (FDIC).

Separated investment from commercial banking. By separating the two, commercial banks were prohibited from using depositors funds for risky investments

FDIC

Insures future savings held by member banks. If a bank failed, the government would fully pay what was owed to its depositors

Securities and Exchange Act

Created today’s Securities and Exchange Commission (SEC), empowered to enforce stricter laws to prevent abuses and fraud in the financial markets

Gold drain

New Deal legislation took the US off the gold standard and prohibited its hoarding by the public

Gold Reserve Act

Americans who possessed gold must turn it in to the Federal Reserve and exchange it for unbacked paper currency.

The Populist dream of greenback currency had finally come to pass

Twenty-First Amendment

Repealed the Eighteenth Amendment, ending Prohibition to ease national mood

Up to now, the 18th Amendment has been the only Amendment to be…

Repealed

During FDR’s first hundred days, Congress passed 15 significant pieces of legislation. Since then…

The first 100 days of a presidential term have become symbolic—the timeframe is considered to measure a president’s early success

Recovery programs were (temporary or permanent?)

Temporary

Give an example of a temporary Recovery Program

Agricultural Adjustment Act (AAA)

• The government offered subsidies (payments) in exchange for limiting the production of specific products

• Prevented overproduction

Dust Bowl

A decade-long drought descended on the Great Plains, stirring up giant dust storms

Relief programs were … (temporary or permanent?)

Temporary

Involved efforts to aid the unemployed by creating government-financed public works projects

Give an example of a temporary Relief program

Works Progress Administration (WPA)

• Aimed at creating temporary government-paid jobs for adult men and women who worked on public works projects building schools, roads, dams, bridges, houses, etc…

What was the largest and most ambitious New Deal relief agency?

Works Progress Administration (WPA)

Keynesian economics

The idea that massive government deficit spending was necessary to stimulate economic growth (demand-side economics)

Whose economic ideas gave FDR’s administration a theoretical justification for raising the national debt

John Keynes

Reform- the 3rd category of the New Deal programs- also known as the “Second New Deal” was (Permanent or temporary??)

PERMANENT

Give an example of a Reform program

Social Security Act (SSA)

• Provided for old-age pensions

• Set up an unemployment compensation system

• Gave welfare payments to the blind, disabled, and dependent children

• Imposed a mandatory “payroll tax”

• The Act made the federal government the country’s primary social welfare provider

The country’s first and most enduring “entitlement” program

Social Security Act (SSA)

National Labor Relations Act 

Was it reform? What did it do?

Yes, the National Labor Relations Act was reform legislation

It empowered the federal government ot assist low-paid, unskilled workers in joining unions

Permitted employees to vote for union representation without employer interference

If most of a company’s workers voted to join a union, management was compelled to negotiate on all matters (collective bargaining)

The National Labor Relations Act created the…

National Labor Relations Board (NLRB)

• Administered and supervised union elections

Committee of Industrial Organizations (CIO)

Formed by union leaders, this organization organized workers by their industry

Industrial unionism

Which industries had the most success?

organized workers by industry

Mass production industries like the automobile and steel

The new Democratic coalition of voters that helped FDR win a second term in 1936 included…

organized labor, urban ethnic groups, Jews, and Catholics, small farmers, and for the first time, African Americans

What were the complaints of Progressive Liberals about FDR’s New Deal

They complained that the New Deal had not gone far enough, charging it failed to fix the fundamental inequities existing in American society (poor people stay poor)

What were Conservatives’ complaints about FDR’s New Deal?

Republicans and business leaders claimed the New Deal represented the advent of socialism in America

(the federal government taking it upon itself to redistribute private income to people who had not earned it, and destroying personal responsibility and work ethic)

What was the New Deal’s legacy?

• It represented the advent of the modern “Welfare State” in America

• Marked a permanent change in the American perception of the government as it assumed primary responsibility for the welfare of citizens