HERE COMES THE BUST

The Great Depression

What Went Right

Andrew Mellon served as Secretary of Treasury for 3 republican administrations

Mellon Program:• Govt should apply business principles• Created Bureau of Budget• Created General Accounting Office• 3 goals: balance the budget, reduce the debt, and cut taxes• Federal budget fell from $6 billion to less than $3 billion / a major

cost had been the debt from WWI (26 billion)• He pushed for lower tax rates ; 4% to 73% (down to .5% to 25%) he

believed that lower taxes encouraged more investment• Supply side economics – with lower taxes Americans would earn

more money, and the govt. would ultimately collect more taxes

What Went Right

Hoover’s Cooperative Individualism –• As Secretary of Commerce Hoover will REALLY

encourage businesses to create associations• He will also bring a balance to govt. regulation

What Went Right

• Coolidge once said “the business of the American people is business”

• He supported laissez-faire (believed that natural cycle would solve economic problems)

• Stock market will do well setting new highs• Buying stocks on “speculation”• “buying on margin”• Consumer goods were readily available and affordable• Money kept pouring into the economy, companies did

well, jobs were created

What Went Wrong?• With war over, farmers will again be subject to

overproduction• Agricultural prices dropped drastically• Congress will pass laws to attempt to fix prices, but

Coolidge vetoed them• Overproduction will have devastating effects on the

environment• Poor farming techniques and a severe drought led to the

“dust bowl”• These storms will displace thousands of families and make

entire towns uninhabitable

What Went Wrong?The Great Crash :• Long Bull Market (lasts as long as there are new customers) Sept. 1929, professional investors

began to sense problemsMonday October 21, Groucho Marx received a call from his broker “you’d better get down here with

some cash to cover your margin”Marx stated “people were shouting orders to sell and others were frantically scribbling checks in vain

efforts to save their original investments”• October 24 became known as “Black Thursday”

Groucho visited his broker one last time …. “he was sitting in front of his now stilled ticker tape machine , with his head buried in his hands, ticker

tape was strewn all around him on the floor, and the place ….. Groucho tapped him on the shoulder and said “aren’t you the fellow who said nothing could go wrong?” “I guess I mad a

mistake” the broker wearily replied . “No, I’m the one who made a mistake “, snapped Groucho, “I listened to you”

• October 29, 1929; “Black Tuesday”, stocks lost 10-15 billion in value; by mid November more than 30 billion had been lost

• The crash was not the main cause of the depression, but it weakened the economy’s ability to recover

Banks in a tailspin:• The crash had weakened the banks• Banks had lent money to the speculators• Many banks had invested deposits into the market• When the market collapsed, banks lost money on their

investments and speculators defaulted on their loans• Less credit was available to consumers • Some banks were forced to close• Customers lost their money• These bank failures led to “runs on the banks” (1929 and

1930)

What Went Wrong?

Roots of the Depression

• Uneven distribution of income: the top 30% was owned by the top 5%; average income rose 8% (2500 a year); many had bought on credit

• Loss of export sales: banks had invested in stock markets instead of foreign banks; foreign markets were closing

• Hawley-Smoot Tariff: raised the tariff to the highest levels in US history; foreign countries responded w/ higher rates

• Mistakes by the Federal Reserve: kept interest rates low; banks made risky loans, business leaders thought the economy was still growing, and took loans for expansion; when the depression hit, they rose interest rates and tightened credit

Hoover and the Depression

• Unemployment increase rapidly; homelessness

• People rely on “soup kitchens” and “bread lines”

• Hoovervilles

FDR Takes Over

1932 Election:• Franklin Roosevelt against Hoover• An optimistic demeanor and promise of swift govt. action• The first president to use the radio to his advantage• “fireside chats” – to instill confidence in the banks• He was ready to experiment w/ govt. power and action• Direct relief – federal help ; was willing to engage in “deficit

spending”• Introduced the “New Deal” – a collection of govt. programs• First 100 days

The First New Deal

• Civilian Conservation Corps• Agricultural Adjustment Act• Federal Deposit Insurance Corporation• National Industrial Recovery Act• Tennessee Valley Authority

The Second New Deal

• National Labor Relations• Social Security Act• Revenue Act

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Roosevelt’s Critics• Roosevelt’s reforms will create controversy• Too much governmental control over business and the economy• Two former “democratic” presidential candidates accused FDR of “socialism” and showed

no respect for the “rights of person and property”• The American Liberty League was formed to teach the necessity and importance of

people’s rights and property• Father Charles Coughlin – a Catholic priest and a well-known radio personality of the

1930’s and had over 40 million listeners; claimed FDR did not go far enough; called for nationalization banks and redistribution of wealth; known for anti-semitic remarks (Anti-Jewish); eventually forced off the air for his remarks and praise of Adolf Hitler and Mussolini

• Huey P Long – senator from Louisiana; as governor of his state, he had become head of a political machine; he built his political base through working to help the poor and underprivileged; as a senator he supported redistribution of wealth and a guaranteed income of 2000 per family per year, he proposed a law limiting income to 1 million and the govt. taking the rest in taxes; many believed he would run for president in 1936, but the son-in-law of one of his political enemies assassinated him Sept. 1935

The Court Packing Scheme

• Another source of resistance for FDR was the supreme court• It had struck down many of his programs as unconstitutional • In 1937, after re-election, FDR proposed his “court packing

scheme”• The constitution did not specify the number of judges, he

proposed increasing the number from 9 to 15• FDR would then be able to appoint judges that favored his

programs• Opponents will compare FDR to dictators rising in Europe• Eventually he had to withdraw his request

Effects of the New Deal• Although a revolutionary approach, the New Deal failed to end the Great Depression;

on the eve of WWII, unemployment was still high and the economy was still hurting• It did, however, provide limited relief and help some stay afloat until WWII brings an

economic boom• Labor – the New Deal will help labor in many ways; industries were required to

recognize workers “right to unionize”; a powerful new union, Committee for Industrial Organization (CIO) was formed; in 1937, the Supreme Ct upheld the Wagner Act causing business to comply with union guidelines; unions became consistent supporters of the Democratic Party

• Women and Minorities – overall they did not benefit much; federal programs tended to favor young white males on the grounds that they were the breadwinners; allowed businesses to pay women less; many minorities still worked a farmers and migrant workers, as a result their lack of payroll records excluded them from govt. programs like Social Security; Ne Deal programs also sanctioned segregation; throughout the Great Depression, African-Americans suffered the highest rate of unemployment; despite this, many African-Americans began to switch their loyalty from Republican party to the Democratic party in the mid 1930’s