Great Depression and New Deal Before Flashcards
What is buying on margin, and how did it affect the stock market in the late 1920s?
When an investor buys on margin, the investor puts up a portion of the price for a stock and a broker advances the rest of the money. The wide availability of margin credit fueled an environment of stock market speculation, and stock prices skyrocketed throughout 1928 and 1929.
Define:
Bank Run
Banks don’t keep all of customer deposits on hand; rather they lend out the funds to individuals or companies. A bank run takes place when many customers withdraw their money simultaneously, out of fear the bank may become insolvent, and was a commen feature of the early 1930s.
As money is withdrawn the likelihood of default increases, thus triggering further withdrawals. Although it may be solvent, a financial institution drained of currency in a bank run may be forced to declare bankrupcy.
How had farmers reacted to the decline in crop prices in the late 1920s?
In an effort to make up for the shortfall caused by the decline in prices for crops such as grains, corn, and cotton, farmers planted more crops, driving down prices even further as more crops reached the market.
1929 saw an exceptionally good harvest, outstripping demand and driving prices down to record lows.
In mid-1929, there were already signs that the boom economy of the Roaring 20s was slowing. What consumer purchase indicators presaged an economic slowdown?
Many consumers were no longer buying on the installment plan; having purchased dishwashers, cars and other goods in abundance. With wages stagnant many borrowers simply could not afford further purchases.
Despite the slowdown in consumer purchses, factories still continued to produce consumer goods in large numbers, creating a surplus.
During October of 1929, Congress debated the Smoot-Hawley Tariff, which would establish the highest tariff rate in history. What effect did this debate have on the stock market?
The stock market experienced massive fluctuations, lending an air of uncertainity to the market and leading to record amounts of buying and selling.
On _____ _____, October 24, 1929, investors sold 13 million shares on the New York Stock Exchange, and the market lost some 11% in value.
“Black Thursday”
Several leading bankers stabilized the market on Friday, October 25, but the sell-off resumed on Monday, October 28, when the market collapsed 13%, a day known as “Black Monday.”
The final “Black” day of the 1929 Stock Market Crash was “Black Tuesday,” when the market lost an additional 12% in value. What hastened the market’s collapse?
During the pre-crash boom, many speculators had purchased stocks on margin. As the stock market began to fall, brokers were forced to sell off the stocks purchased for their customers on margin. This created a snowball effect; as stocks continued to fall, more speculators were sold out.
How did the 1929 Stock Market Crash affect banks?
Many banks had invested in the market and faced significant shortfall; several faced insolvancy. The Crash also prompted a run on gold deposits, further reducing the amount of deposits banks had on hand. As a result, banks curtailed their lending activities, contributing to an economic slowdown.
How did the Federal Reserve react to the 1929 Stock Market Crash?
Although the Federal Reserve was responsible for overseeing the economy’s banking sector, it did little to aid banks. In fact, the Federal Reserve raised interest rates in the two years following the Crash, further exacerbating the economic slowdown.
In 1930, Congres raised the tariff to record highs by passing the Smoot-Hawley Tariff. What effect did this have on the economy?
Already slowed by the 1929 Stock Market Crash, the increased tariff led to retailation by foreign countries, which raised their own tariffs. As a consequence, U.S. exports dropped by 66%, devastating the U.S. economy.
What was the Reconstruction Finance Corporation?
Established in 1932, the Reconstruction Finance Corporation was one of Herbert Hoover’s attempts to aid the ailing U.S. economy. The The agency gave $2 billion in aid to state and local governments, railroad companies, banks, and other businesses. The Corporation was a model for several of the New Deal agencies.
What was the Federal Home Loan Bank Act (1932)?
Signed into law during Hoover Adminsitration, the Federal Home Loan Bank Act sought to lower the cost of home ownership by providing funds to federal savings and loans to be used to fund home mortgages. The Act’s purpose was to reduce home foreclosures during the early years of the Great Depression. While foreclosures were reduced, it had little effect on the economy as a whole.
In 1932, Herbert Hoover attempted to revive the U.S. economy by signing the Emergency Relief and Construction Act. What did this act provide?
The Emergency Relief Act was the first ever Federal relief act, which released funds for public works projects (such as highways and building projects) througout the country.
The Emergency Relief Act was expanded by President Roosevelt as part of his New Deal line of programs.
In 1931, at the suggestion of President Hoover, 15 countries agreed to the Hoover Moratorium, which suspended the Dawes Plan and all war debt payments, including reparations. What was the Moratorium’s effect?
The Moratorium prompted a number of bank defaults in Europe and the United States, as customers withdrew their funds. Designed to stave off a depression in Europe, the Moratorium had only a negligible effect on the economy.
What was the Federal Farm Board?
Founded shortly before the 1929 Stock Market Crash, the Farm Board was greatly expanded in response to the drop in crop prices in 1930 and 1931. The Federal Farm Board attempted to drive up prices by holding cotton and grain in storage, reducing the supply.
Unfortunately the Board’s efforts were too modest to have much of an effect on the economy.
What was the Bonus Army?
In 1932, thousands of unemployed World War One veterans marched on Washington and demanded immediate payment of bonus certificates that had been awarded to them in acknowledgment of their service, but which weren’t cashable until 1945.
The Bonus Army, as it came to be called, arrived en masse at the U.S. Capitol, demanding that Congress enact the Bonus Bill, providing them with their Bonuses.
How did President Hoover respond to the arrival of the Bonus Army in Washington D.C. in 1932?
After the Bonus Army attacked police following the failure of Congress to pass the Bonus Bill, Hoover ordered out the U.S. Army. Douglas MacArthur used troops, tanks, and tear gas to drive the veterans from Washington.
In 1932, the Democratic Party nominated New York’s Governor, Franklin Roosevelt, to run against President Hoover. What were the central components of Roosevelt’s campaign?
Roosevelt sharply critiqued Hoover’s deficit spending, contending that government extravagance had led to the worsening Depression. Roosevelt promised to streamline the government, cut government expenditures by 25%, and balance the budget.
In addition, Roosevelt supported repealing Prohibition, hoping that grain purchases by brewers and distillers would raise crop prices.
What were the results of the 1932 Election?
Running for re-election in the midst of a Depression, Hoover was resoundingly defeated. In addition, Democrats swept both houses of Congress.
In between his defeat in November, and Roosevelt’s inaguaration in March 1933, President Hoover sought to work with the Roosevelt in an effort to cope with the worsening Depression. How did Roosevelt respond?
Hoover sought Roosevelt’s permission to issue a joint statement to reassure the country, and to enact a bank holiday, during which banks could sort out their assets and determine their solvency. Roosevelt ignored Hoover’s request, and failed to even respond to Hoover’s letters.
By the time of Roosevelt’s inaguaration 1,000 more banks had closed, mainly in agricultural areas.
Define:
New Deal
In response to the Great Depression, President Roosevelt announced a “New Deal,” compososed of the three R’s:
- relief for the unemployed
- recovery of the economy as a whole
- reform of America’s eonomic institutions
President Franklin Roosevelt’s advisors, many of them professors from elite universities, were known as the _____ _____.
Brain Trust
Members of the Brain Trust were appointed to run several of the new Federal agencies that appeared as a result of Roosevelt’s Hundred Days Legislation, including Rexford Tugwell of Columbia, who ran the Agricultural Adjustment Administration, and Hugh “Iron Pants” Johnson, who presided over the National Recovery Administration.
Immediately after his inaguaration, President Roosevelt called Congress into a hundred day session to consider legislation to address the economy. What agencies resulted from the “Hundred Days?”
At Roosevelt’s direction, Congress passed legislation which established several agencies directed at stimulating the economy, including the:
- Works Progress Administration (WPA)
- Civilian Conservation Corps (CCC)
- Agricultural Adjustment Act (AAA)
- National Recovery Association (NRA)
On his first full day in office, President Franklin Roosevelt announced the closure of what type of businesses?
On March 5, 1933, President Roosevelt announced a “bank holiday” and ordered all banks closed. The measure was necessary, he contended, to prevent further bank runs, and to allow the government and the banks themselves to asses their solvency.
Although many banks would never reopen, on March 9, 1933, Congress passed the Emergency Banking Act, which allowed banks to reopen on March 13, provided they were solvent. The Emergency Banking Act provided an explicit federal guarantee of all bank held funds, and stopped further runs.
Passed as part of Franklin Roosevelt’s “Hundred Days” legislation, what was the purpose of the Public Works Administration (PWA)?
The PWA employed millions of unskilled workers on public works projects, such as building parks, post offices, and bridges.
The Civilian Conservation Corps (CCC) was established In 1933 as part of the “Hundred Days” legislation. What was this agency’s purpose?
The CCC focused on forestry, the prevention of soil erosion, flood control and similar projects. Aimed primarily at young men, whose families received $25 (the young men only received $5), many of the camps were set up in National Forests, and under the control of the Army.
How did the Agricultural Adjustment Act (1933) seek to remedy the low crop prices that plagued farmers in the early years of the Depressio
The Agricultural Adjustment Act (AAA), passed during the “Hundred Days” paid farmers to let a portion of their land lie unplanted, in the hopes that the crop supply would be reduced, and the price of those crops would increase.
Although the AAA did stabilize prices, it had a disastrous effect on sharecroppers in the South, where landowners merely removed the sharecroppers from their land, or failed to pay AAA money forward. Sharecropping became exceedingly rare.
In 1935, the Supreme Court ruled the AAA unconstitutional.
What was the National Recovery Act (1933)?
The National Recovery Act (NRA) was one of the first New Deal programs, passed as part of Roosevelt’s “Hundred Days Program.” The NRA suspended the antitrust laws, and required each industry to set amounts for finished products, wages, hours of work, and maximum goods produced.
The NRA, modeled on a similar program established by Benito Mussolini, had only a negligble effect on the economy, and the Supreme Court ruled it unconstitutional in 1935.
