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Stock Market Crash and the Great Depression Causes of the Great Depresssion 1. Stock market speculation 2. Contracted money supply a. Low interest rates inflated money supply by 60% b. Jan. 1928 to Aug. 1929 discount rate rose from 3.5 to 6. c. Money supply shrank 30% from Aug. 1929 to March 1933. 3. Hawley Smoot Tariff Points Debated 1. Did “hands off” government policies cause the crash? 2. Was the crash and speculation a symptom of monetary policy? 3. Was Hoover really laissez-faire? 4. Did Roosevelt’s policies help or prolong the economic downturn? Hoover Elected in 1928 Labeled by some as laissez-faire. Expanded the government and raised taxes. Pursued similar policies as Roosevelt Signed the disastrous Hawley-Smoot Tariff Stock Market 1. Speculation—drove up stock values. a. margin loans—put down small amount to buy stocks, borrow rest. Drove up stock prices, big profits. b. $9 billion in loans c. stock values and prices not even close. At least twice their value. d. gambling e. companies gave brokers money for margin loans because they could make more money. f. Didn’t reinvest profits. Stock Market 2. Stock market crash—October 29, 1929 a. Steep decline instead of 1 or 2 day crash b. Peaked in September, stock prices dropped Sept. 4 c. October 24 lost 21 points in an hour d. October 28 lost 38 points, or 13% e. October 29, Black Tuesday. 16 million shared sold, no one there to buy. Stock Market f. By mid-November, $30 billion lost g. Stocks not even 20% of prior value by March 1933. Hawley Smoot 1. June 1930 2. Details a. raised tariffs to an all time high b. 1,000 economists petitioned him not to sign -raise prices to consumers -damage exports, hurt farmers -promote inefficiency -retaliation Hawley Smoot Effects of: Agr tariffs raised 20%-34%. Lost 1/3 of market 9,000 rural banks closed. Booze: 36%-47% Clocks 45%-55%. $4.50 per clock Corn and butter doubled Wool: 140% 800 items in automobile production. **If foreigners can’t sell here, they can’t buy here. Hawley Smoot Stocks fell in 1930. 1929: 381 April 1930: 294 Hoover’s Efforts 1. Hawley Smoot 2. Pressured business not to lay off or cut wages. 3. Billions in business subsidies to farmers and business. 4. Doubled the income tax in 1932 5. Other taxes a. Bank checks b. Gas and auto c. Stamps Hoover’s Efforts d. Corporate and estate e. Earned income tax credit abolishe 6. Government share of GNP rose from 16.4 to 21.5%. 7. Federal Reserve raised discount rate 1 Democrats exploited the crash a. Hoovervilles—homeless settlements b. Hoover blanket—newspaper c. Hoover flag—pocket turned inside out d. Hoover hog—rabbit 2. Irony was the Hoover was known as a humanitarian. New Deal 1. Series of programs to deal with the Great Depression. Not a single initiative. 2. Franklin Delano Roosevelt a. elected in 1932 b. appeal -optimism -charisma -willingness to try anything -ability to say what people wanted to hear -“fireside chats” in 1933 c. only child in wealthy family, educated at Harvard and Columbia law school, polio in 1921. d. Political career: New York State Senate in 1910, Assistant Secretary of the Navy 1913-1920, ran for VP in 1920, and Governor of New York 1928- 1932. 3. Strategy of New Deal a. deal with financial crisis and provide short term relief b. promote industrial recovery thru federal relief and cooperative agreements between management and labor. c. raise commodity prices by paying farmers to reduce crops and herds. d. federal government to assume a larger role; FDR received broad powers to enact New Deal. 4. Keynesian Economics a. John Maynard Keynes b. Supply money on the demand side by giving people jobs, which puts money in their pockets, which they will spend. c. criticisms: taking money from those who create wealth 5. World War I mobilization a model. 6. Strengthening the monetary system a. first thing FDR did. b. closed several banks and declared a banking holiday 7. Emergency Banking Relief Act—allowed good banks to reopen with licenses from the Treasury Department, provided managers to ones in trouble. 8. Glass-Stengall Banking Act a. created the FDIC—insured deposits up to $5,000 b. separated commercial and investment banking to prevent speculative abuses. 9. Federal Securities Act a. Securities and Exchange Commission -regulate stock and bond market -disclosure 10. Took U.S. off of the Gold Standard First Hundred Days FDR’s self-imposed deadline to get legislation passed Alphabet Soup 1. Federal Emergency Relief Act a. sent money to help the states b. ½ was direct relief; other half $1 for every $3 spent by the state 2. Civilian Conservation Corp (CCC) a. give work to unemployed and unmarried men 18 to 25 b. worked in woods, forests, parks, etc. c. $30 a month, $25 went to families d. high school diploma 3. Agricultural Adjustment Administration a. compensated farmers for a voluntary cutback in production b. plow-under—destruction of a bumper crop c. subsidies for surpluses 4. Tennessee Valley Authority (TVA) a. overall planning for Tennessee River Valley— 41,000 square miles. b. multipurpose: dams, electricity, power plants, etc. c. by 1936, six dams built or underway d. focus became cheap power e. controversial; step towards socialism 6. National Industrial Recovery Act a. National Recovery Administration -codes for business recovery b. Public Works Administration -$3.3 billion for roads, public buildings, schools, post offices. 7. Brain Trust a. Roosevelt’s Ivy League Advisors Second New Deal 1. Roosevelt’s Critics a. American Business League -conservative businessmen -loss of personal liberties, property rights, growing welfare state. b. Father Charles Coughlin -“radio priest” national talk show with 40 million listeners. -attacked FDR from the left; he wasn’t doing enough. -attacked Wall Street, bankers, etc. Anti- Semitic. c. Francis Townsend -Old Age Revolving Pension Plan -$200 per month to those over 60, had to be spent in 30 days. -Townsend Plan; basis for Social Security d. Huey P. Long “Kingfish” -Elected to U.S. Senate in 1930. -New Deal didn’t go far enough. -Had Presidential ambitions -Share Our Wealth • Liquidate personal fortunes • Every family gets $5,000 allowance, workers get $2500 annual income • Pension for aged, reduced working hours, free college education • “Every Man a King” -assassinated in 1935. Received strong third party support, bad for FDR. 2. Influence of critics: FDR took New Deal in a more radical direction. 3. Hasn’t ended the depression yet. 4. Second Hundred Days a. Works Progress Administration -similar to Public Works administration -employed 8 million people in 7 years b. Social Security Act in 1935. Payroll tax c. National Labor Relations Act (Wagner Act) -rights for labor: collective bargaining, right to join a union, protection against unfair labor practices. New Deal and the West 1. Dams, cheap power, hydroelectricity, and irrigation 2. Hoover Dam a. Colorado River--$114 million b. enabled water to be sent to Los Angeles c. created Lake Meade, world’s largest artificial lake d. Imperial Valley created by irrigation, one of the most productive agricultural areas in the world. e. opened one million acres to cultivation 3. Central Valley Project a. central California b. water from Sacramento River in the north to arid San Joaquin Valley in the south. c. made large scale farmers wealthy 4. Grand Coulee Dam a. near Spokane, Washington on the Columbia River b. cheap power to stimulate local economy. c. largest project 5. Environmental Costs a. disrupted natural flow of rivers b. disrupted salmon migration in Washington c. reduced Columbia river to a series of lakes 6. FDR liked dams because they were popular and gave him a lot of support in the West. 1936 Election 1. Republicans a. nominated Alf Landon b. avoided the Hate-Roosevelt crowd. Hoping others such as Long would take votes from him. c. Landon actually supported many New Deal programs. 2. FDR won big a. new coalition for Democrats: farmers, ethnic groups, middle class people whose property was saved by the New Deal, labor, and blacks. 1937 Slump 1. Steady improvement in 1935 and 1936 2. In August 1937, economy declined worse than 1929. 3. Reasons for: a. FDR cut spending; deficits and inflation b. less disposable income because of Social Security Taxes—$2 billion. c. private spending couldn’t replace government spending d. business too timid to take risks; no incentive. 4. Divisions in FDR’s cabinet a. Henry Morgenthau, Jr. Less spending and a balanced budget. b. Harold Ickes and Harry Hopkins -more government spending -recession caused by a balanced budget -more anti-trust investigations c. FDR sided with Ickes and Hopkins 5. FDR’s image hurt by the slump Wealthy Tax Act—“Soak the Rich.” 1. 75% tax on all incomes above $5million 2. Estate and corporate tax. 3. Limits of a. Failed to raise revenues. b. Richest 1% raised their wealth after the tax. c. Tax burden fell on lower income people. Social Effects of the Depression 1. petty theft, street corner begging, prostitution rose. 2. Divorces didn’t rise, too expensive. Husbands just left. 3. Birth rate dropped 4. Children a. 1 out of 5 didn’t get enough to eat b. 900,000 left home Conclusion 1. New Deal didn’t restore prosperity, did ease suffering 2. Role of federal government radically increased. 3. South and West transformed because of government intervention 4. Democrats became the majority party until 1994 in Congress 5. Depression solved by boom that accompanied WWII. 1. What are interest rates? 2. How do high rates influence behavior? 3. How do low rates influence behavior? 4. What happens when rates go from low to high?
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