Great Depression & New Deal

Part I. What Caused the Great Depression?

The stock market crash of 1929 was the event that started the Great Depression. The depression was caused by several weaknesses in the economy.

Was the Stock Market Crash THE Cause? No.

• The percentage of American households owning stock in 1929 was probably less than ten percent. Today it's about 50 percent -- largely because of retirement plans like 401(k)s.

• ULTIMATELY THE EFFECTS OF THE CRASH WERE IN A LOT OF WAYS PSYCHOLOGICAL.

http://marketplace.publicradio.org/features/crash_1929/story_01.html

The Banking Problem

• The crash took an especially heavy toll on the nation's banks. Many had made loans to stock market speculators that could never be paid off -- and simply ran out of money.

• During the Depression, more than 9,000 banks failed nationwide. The stock market crash and subsequent bank failures cost ordinary Americans billions of dollars -- and left many wondering whether their money was safe anywhere.

http://marketplace.publicradio.org/features/crash_1929/story_01.html

Producers Consumers

Wages (Jobs)

Purchases

Primary Causes of the Great Depression

1. Not Enough Buyers

• 40% of all families lived in poverty—before the crash

• The richest 1% owned 59% of the nation’s wealth.

• The poorest 87% owned only 10% of the nation’s wealth.

• Therefore, demand for many products was low.• The market for luxury goods was destroyed by

the crash.

2. Too Much Debt

• People began buying many goods on credit, often more than they could afford

• 80% of all families had no savings

• What happened when people couldn’t pay back loans?

3. Over-speculation in Stocks

• A “Get Rich Quick” attitude caused many to speculate.

• People risked everything by buying “on the margin.”

• When the market collapsed, these investors lost everything—banks collapsed because loans weren't repaid

4. Overproduction & Layoffs

• Industries were producing much more than could be sold.

• They were forced to lay off workers and lower prices.

• The cycle gets worse…

5. Farming Crisis

• Farmers suffered through droughts and low prices.

• With low prices, farmers were unable to repay their loans or purchase goods.

• More banks collapsed.

6. Government Mistakes

• The government set low interest rates before the crash and raised them afterward.

• Stock market speculation was unregulated.

• Bank deposits were not guaranteed.

Part 2: The Effects of the Great Depression

Christmas Day Breadlines in New York City, 1931

Summary of effects

• Unemployment: 25%• Homelessness• Hunger• Psychological

depression• More Cooperation

Part 3: Solutions

• At first, President Hoover favored the traditional government approach—do little and wait for things to get better.

• Private charities were responsible for helping the poor

Hoover’s Attitude

“I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering…though people support the government, the government should not support the people.”

--Herbert Hoover, 1930

Discussion: why do you think Hoover believed this?

Desperate times call for desperate measures…

• Hoover himself began to change his views…

• Hoover started some huge projects (like the Hoover dam)

• Tariffs were raised, but this backfired

• Hoover supported programs to help banks extend loans to struggling businesses

Election of 1932

• By 1932, the American people wanted new leadership.

• Democrat Franklin Delano Roosevelt (FDR) easily defeated Hoover.

• Roosevelt promised the American people a New Deal.

FDR’s Inaugural address

“The only thing we have

to fear is fear itself”

Part 4: The New Deal

• The New Deal was FDR’s plan to help the nation get through the great depression by enacting many government programs designed to provide:

ReliefRecoveryReform

Examples of New Deal programs include…

Federal Emergency Relief Association

• FERA helped fund local relief efforts.

• However, FDR

wanted to avoid government “handouts”

• So…

Public Works Programs

Government jobs helped people get by…

But who would pay their salaries?

FDR endorsed deficit spending

• The government has a deficit when it spends more than it collect in taxes. This money is borrowed to be paid back in the future.

• When is it appropriate for the government to deficit spend?

Other Programs: FDIC

• The Federal Deposit Insurance Corporation guaranteed bank deposits—this helped restore confidence in banks.

Wagner Act

• Guaranteed the right of workers to join labor unions.

Social Security Act

• Collects Social Security taxes from all workers.

• Pays government pensions to retired people and disabled people

Results of the New Deal

• Helped people get by, eased suffering

• Provided hope

• It did NOT end the depression (WWII did)

• Tradition of a more active and more expensive government