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U.S. History Curriculum
XI. THE GREAT DEPRESSION
& THE NEW DEAL
Understand the causes of the Great Depression.
In October, 1929 the collapse of the values on the New York Stock Exchange caused a world-wide chain reaction leading to the most severe economic depression in history, and producing disastrous social and political consequences. No single factor contributed so heavily to the triumph of totalitarianism.
Prior to World War I international prosperity came from a world market in which goods, money, and labor moved virtually unobstructed to where they were in the highest demand, that is, where they were the most productive. This movement had to contend with protective tariffs, but prior to 1914 these tariff barriers were not high enough to significantly impede the natural flow of the international economy. World War I changed this system. All the belligerents overdeveloped their industrial sector to produce war goods.
After the war it proved difficult to mend the broken trade links and restore the economic balance. The immediate problem was the uneven distribution of currencies that were internationally accepted (e.g. the dollar, pound sterling, Swiss and French franc). Wartime purchases had siphoned off a great deal of European wealth to the neutrals: in the 1920s the U.S. owned 40 percent of the world's gold reserve. Convertible currency -- the lifeblood of international trade -- was in such short supply that many European countries were unable to engage in significant trade. Their currencies turned into tokens with a strictly internal circulation. To remedy this situation and to stimulate trade on which the health of their own economies depended, the capital rich countries--the U.S., Britain, and France--poured in the 1920s a great deal of money in the form of loans and investments into the capital poor countries, especially Germany.
A second factor that inhibited postwar trade was the steady rise of tariff barriers. In 1922 to protect its overexpanded industries from competition the U.S. began increasing its tariffs. The 1930 Hawley-Smoot Tariff raised U.S. tariffs to an all-time high with ad valorem rates that averaged from 32 to 40 percent. The total length of European frontiers in 1920 was exactly double that of 1914; each new mile of frontier represented another economic hurdle to the movement of goods. The shortage of convertible currencies and the simultaneous increase of tariff barriers created a vicious circle: to raise hard currency each country sought to obtain the most favorable balance of trade. Gradually, the international economy began to move toward each state being generally self-sufficient. In the meantime productivity was rising everywhere.
In 1920 the ex-Allied nations owed the United States about $10.3 billion for wartime and post armistice loans. The Europeans had spent most of these funds in America to purchase war goods, thereby contributing to America's booming prosperity in 1917-18. Despite the pleas from the Allied governments that they had suffered tremendous casualties in comparison to the Americans, and that the U.S. consider the money as its contribution to the joint war effort, the American government maintained that the loans represented financial transactions that required repayment in full and with interest. Reparations and the repayment of the U.S. loans were interrelated, and as long as the U.S. government demanded its money from its ex-allies, they would demand their reparation payments from Germany.
The steady outflow of reparations payments, as well as an adverse balance of trade, caused a steady depreciation of German currency. In the spring of 1921 one U.S. dollar equaled 65 marks; in September, 1923, it was worth 9 million marks, and in November 1923, 4.2 trillion. As the mark became worthless, so did bank savings, investments, securities and loans. The German middle class, whose livelihood depended on such values, grew to detest the republic and they moved to the right politically. In the fall of 1923 the Weimar Republic seemed on the verge of collapse. In October the communists staged an uprising in Hamburg, and in November right-wing extremists, led by, among others, Adolf Hitler, attempted a coup in Munich. Both revolts failed, but the danger of sedition remained.
The Allies realized that it was not possible to keep on squeezing Germany without regard to its ability to pay. In 1924 they appointed a commission headed by the American financier Charles Dawes to draw up a plan for the economic reconstruction of Germany. Under the Dawes's Plan a schedule of reparations payments was set up and Germany received sizable international loans. The Germans used a part of these loans to meet their reparations obligations, thus easing the strains on their economy. The U.S. lent money to Germany which enabled it to pay reparations to the European ex-allies, which enabled them to make war-debt payments to the U.S. This system worked until the Great Depression caused U.S. financial institutions to stop making loans to Germany. The inability of the U.S. to make the German loans helped cause the entire world-wide economic system to collapse, and bring Adolf Hitler to power in Germany.
In the 1920s the America economy was also in bad shape since wages lagged behind rising productivity. Between 1920 and 1929, hourly industrial wages rose only 2 percent, while the productivity of workers in factories jumped 55 percent. Corporate profits and dividends increased 62 and 65 percent respectively, from 1923 to 1929, while wages and salaries on average enjoyed only an 11 percent increase in real income. At the same time, the real income of farmers was declining because agriculture prices were falling while taxes and living costs were rising. In 1910 the income per farm worker was about 40 percent of the nonfarm worker, in 1930 it was about 30 percent--in 1930, the rural population of America was 20 percent of the total population, and their poverty helped pull down the economy of the entire nation.
The major problem in the American, and many other economies, was the maldistribution of wealth. In 1929, 42 percent (11.5 million) of American families made less than $1,500 a year, the government established minimum level of subsistence. Twenty-one percent made less than $1,000 per annum. One-tenth of 1 percent (36,000) of the families at the top received an income nearly equal to the 42 percent of the families on the bottom. This maldistribution meant inadequate purchasing power for the masses.
Eventually, factories produced more goods than people could purchase, and they began to cut back on production. In the U.S. many people "played the stock market." There was no government control of the New York Stock Exchange and many people bought stocks on the margin--borrowing up to 90 percent of the price of the stock. Often they would mortgage their home as collateral. As long as stock prices increased as they did during the 1920s this borrowing created few problems. People bought their stocks at low prices, held them until their loan was due, sold them at high prices, and paid off their loan and made a profit. But in 1929 sophisticated investors realized that many stocks were overvalued -- the value of stocks were worth more than the value of the corporation that was selling them. With the cut back of industrial production they began to sell their stocks, at first slowly, but on "Black Thursday," October, 24, 1929, a record 13 million shares were sold, and values collapsed. By the end of October, more than $30 billion in paper values had been wiped out.
The American, and world economy, continued to decline during the next three years. For example, United States Steel stock fell from 262 to 22, General Motors, from 73 to 8. Five thousand banks failed in the U.S. alone. In July 1932 the U.S. steel industry was only operating at 12 percent of capacity. Twenty-five percent of the labor force in the U.S. was out of work.
The Great Depression was unique not only for its intensity but also in its worldwide impact. American financial houses were forced to call in their short-term foreign loans. By 1932 world industrial production, excluding the Soviet Union, fell 36.2 percent. The maximum decline in any previous depression had been 7 percent. World trade shrunk from $68.6 billion in 1929 to $24.2 billion in 1933. The previous maximum drop in international trade had been 7 percent. In 1932, when the Depression was at its worst, about 22 percent of the world labor force, or 30 million people, were jobless.
Understand President Herbert Hoover's response to the Great Depression.
Few of the leaders of American business and politics, either Republican or Democrat, had expected the crash. And when it came, very few of them understood what had caused it or foresaw the severity of the depression it would bring -- Herbert Hoover was not an exception. Hoover remained convinced that the economy was basically sound and that government should not interfere with it. He did take steps to try and prevent the spread of the depression. In a series of conferences he tried to persuade business leaders to keep wages and prices up voluntarily. In an attempt to create jobs, he had Congress authorize $500 million in public works (Hoover Dam is the most famous example).
Hoover's efforts were too meager to check the contraction in private spending, investment, and employment that followed the crash. Hoover was determined to keep a balanced, or nearly balanced, budget, and he refused to countenance any more government spending. The economy continued to decline; in 1931 2,294 banks with deposits of almost $1.7 billion closed their doors. Each collapse buried the cash and savings of depositors, most of whom had no other resources. By 1932, 25 percent of the work force was unemployed--13 million workers with about 30 million dependents. Average manufacturing wages fell from $25 to less than $17 a week, and average salaries declined by 40 percent.
The depression carried a frightful burden of human suffering. Thousands of middle-class families, their incomes dwindling, sometimes entirely gone, lost next their savings, then their insurance, then, unable to pay their mortgages, their very homes. Farm prices collapsed; wheat, for example, fell from $1.03 a bushel in 1929 to 38 cents a bushel in 1932. Twenty-five percent of all farm families in America had been pushed off the land by 1933. More than one hundred thousand small businesses went bankrupt. Laboring men could not find jobs; a rough estimate indicates that about 1.5 million of them simply moved about riding the rails, or like the Joads in the Grapes of Wrath, moved to California looking for work.
Nothing revealed so sharply Hoover's lack of rapport with the people nor caused him such a loss of favor as his inept handling of the Bonus Army. In the spring of 1932 about 20,000 unemployed World War I veterans converged on Washington from all over the country. In the 1920s Congress had authorized World War I veterans a bonus of about $1,000 to be paid in 1945 to compensate them for the high wages civilians were drawing during the war. Responding to the economic crisis, Congress had paid one-half of the bonus in 1931. The unemployed veterans demanded immediate payment of the other half. They set up a shanty town near the capital and took over some land and unused government buildings on Pennsylvania Avenue. When Congress refused their request, most of the protesters went home, but about 2,000 stayed.
In July, 1932 Hoover ordered the eviction of all squatters from government buildings. In the ensuing melee, two veterans were killed and several policemen injured. Hoover and his Secretary of War were convinced that they were facing a Communist uprising of menacing proportions, and they used this incident as a pretext for bringing in the U.S. army under General Douglas MacArthur. Four troops of cavalry with drawn sabers, six tanks, and a column of infantry with fixed bayonets routed the veterans and their families, and then burned their camp to the ground. Hoover's use of armed force against American veterans raised a storm of protest and insured his defeat in the forthcoming election.
In the Presidential election of 1932 the Democrats nominated the governor of New York, Franklin D. Roosevelt. Roosevelt, a distant cousin of President Theodore Roosevelt, had been the party's Vice Presidential nominee in 1920, and Assistant Secretary of the Navy during World War I. Roosevelt had caught polio during the 1920s and he could not walk without assistance. Roosevelt broke tradition by flying to the convention in Chicago to accept the nomination before the convention adjourned. In his acceptance speech he pledged a "new deal" to the American people. The Democrats knew that unless they made a major blunder they had the election won. Thus, during the campaign Roosevelt was often deliberately vague and he took great pains to avoid offending any large bloc of voters. Roosevelt won over 57 percent of the popular vote and carried the Electoral College 472 to 59. The Democrats also gained a large majority in Congress.
Understand New Deal during the first term of FDR.
A few days before his inauguration Roosevelt was in Miami for a public appearance. A demented individual emptied a pistol at him, barely missing him, and killing the mayor of Chicago who stood next to him. If the assassin's bullet had found its mark, and if the Vice President, conservative John Nance Garner, had become President, the history of the U.S. would be very different. As soon as he became President Roosevelt took charge. In his Inaugural Address Roosevelt declared his "firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror . . ." The President pledged himself to ask the Congress to give him "broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe." While Roosevelt said nothing new -- his address had few specifics -- his attitude instilled hope and courage in the people. He made clear that the time of waiting was over, that he had the people's interests at heart, and that he would mobilize the power of the government to help them. In the next week the White House received almost 500,000 letters; a good indication of Roosevelt's immediate impact.
Roosevelt was inaugurated on March 4, 1933. On March 5 he called Congress into special session and he proclaimed a national bank holiday. The method that Roosevelt used to pass the emergency banking bill illustrates the mood of the country. The House had no copies of the bill when it was introduced on the first day of the 73rd session shortly before 1 PM. The Speaker recited the text from the one available draft. With a unanimous shout, the House passed the bill, sight unseen, after only 38 minutes of debate. The Senate approved the bill unamended 73-7 at 7:30 that evening and at 8:05 that same night (March 9, 1933) Roosevelt signed it.
Within the next hundred days Roosevelt sent 14 more major bills to Congress and all of them were enacted into law. These measures committed the country to an unprecedented program of government-industry cooperation (National Recovery Act); promised to distribute large sums to millions of staple farmers (Agricultural Adjustment Act); accepted responsibility for the welfare of millions of unemployed (Federal Emergency Relief Act, Civilian Conservation Corps); agreed to engage in far reaching experimentation in regional planning (TVA); pledged billions of dollars to save homes and farms from foreclosure (Home Owners' Loan Corporation); undertook huge public works spending (Public Works Administration); guaranteed the small bank deposits of the nation (Federal Deposit Insurance Corporation); and, established federal regulation of the Stock Market (Federal Securities Act).
Later, in 1935, to help his reelection campaign, Roosevelt had Congress pass even more far reaching legislation. Ninety percent of all farms in America were without electricity. The Rural Electrification Administration was created to provide isolated rural areas with low-cost electricity. Much of the Roaring Fork Valley received electricity for the first time with its assistance. The National labor Relations Act (Wagner Act) set up the National Labor Relations Board (NLRB) to arbitrate employer-employee differences, and it upheld labor's right of collective bargaining. Previously, in labor-management disputes the government had always sided with management. Under the New Deal the government was at least neutral, and at times pro-labor. Union leaders took advantage of this government attitude (workers were told that "the President wants you to join the union") and union membership skyrocketed during Roosevelt's administration (3,632,000 in 1930 to 14,796,000 in 1945).
In August, 1935 the Social Security Act was passed. This act insured workers against unemployment, injury on the job, and old age. Taxes on workers and their employers financed social security. In many respects the law was inept and conservative. In no other welfare system in the world did the state take funds out of the current earnings of workers. By relying on regressive taxation and withdrawing vast sums to build up reserves, the act helped cause the recession of 1937. The law denied coverage to numerous classes of workers. Sickness was not covered.
Yet for all its faults the Social Security Act of 1935 was a landmark in American history. For the first time the government acknowledged that a citizen had clear-cut social rights. It was framed in a way that withstood tests in the courts and changes of political mood. When told that economically, employee contributions were a mistake, Roosevelt replied: "I guess you're right on the economics, but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program."
Understand the election of 1936.
Beginning in 1934 critics from the left and right began to attack the New Deal. The American Liberty League, an organization of conservative businessmen and politicians, offered the most active opposition on the right. Many of the nation's wealthy hated Roosevelt. They refused to say his name, referring to him as "that man in the White House." Terrified by the prospect of confiscatory taxation, the wealthy viewed Roosevelt as a reckless leader. Accustomed to having their authority unchallenged, businessmen resented the rising empires of government and labor. Roosevelt at first thought that he could forge an all-class alliance, and he worked hard to include businessmen in his coalition. But, by May, 1936 the right-wing attacks had got to him. He began to use the resentment against business which had built up because of the Depression against them.
Yet it should be pointed out that even though the New Deal encroached on traditional business prerogatives, and that Roosevelt attacked moneyed interests for political gain, Roosevelt and the New Deal were not anti-capitalist. Indeed, Roosevelt could advance impressive claims to being regarded as the "savior of capitalism." In many ways Roosevelt was deeply conservative. In the New Deal years, the government sought deliberately, in Roosevelt's words, "to energize private enterprise." All of the New Deal programs sought to strengthen the American system, not to destroy it.
A more serious threat to the New Deal than the Liberty League and other right-wingers were three popular men who appealed to the same underprivileged people as Roosevelt.
The most important challenge to Roosevelt was launched by Senator Huey P. Long of Louisiana. Long rose from the poor farming people of northern Louisiana to educate himself as a lawyer. As governor of Louisiana between 1928 and 1932, Long built roads and hospitals, provided inexpensive or free textbooks and lunches for school children; social benefits that were rare at that time. Long based his national ambitions on a plan called "Share the Wealth," which called for a heavy tax on big incomes and no personal incomes of more than $1 million a year. In addition, he advocated vast public works spending, a national minimum wage, a shortened workweek, a balanced farm program, and immediate cash payment of the World War I bonuses. At a time when millions were destitute, Long made a deep appeal to both the northern worker and southern farmer.
Father Charles E. Coughlin, a Roman-Catholic priest, had a national radio talk show. By 1934 Coughlin spoke to the largest steady radio audience in the world. His mail outnumbered the President's. Coughlin at first supported the President, but gradually he moved away from his programs. His major complaint was that the President was not moving swiftly enough in the direction of inflation. Finally, in November, 1934 Father Coughlin announced the formation of the National Union for Social Justice. Convinced that capitalism was finished, he proposed a system of "social justice" to take its place. His program was similar to that of Italian fascism.
The most benign challenger to Roosevelt was Dr. Francis Townsend. Townsend proposed to pay a pension of $200 a month to every citizen over 60, on condition that they spend it within one month. The pension would be financed by a 2 percent tax on business transactions. The pension aspect of this plan caught on even though critics pointed out that it was economically unfeasible. Roosevelt stole Townsend's thunder by the Social Security Act of 1935, yet Townsend unleashed a new force in American politics: old people. Buffeted by the depression, often an economic burden to their own children, they found in the Townsend program a sense of unity with other elderly people. West Coast politicians (Townsend lived in California) quaked at the threat of Townsend reprisal unless they endorsed his program. On one key vote, 16 out of 20 California congressmen supported a Townsend bill.
The Republicans nominated Alf Landon of Kansas, the only Republican governor elected in 1932 who was not defeated in the Democratic landslide of 1934. Republican hopes rested on the possibility that a combination of Coughlin, Townsend, and other dissident elements under the leadership of Huey Long would draw enough votes away from Roosevelt to allow Landon to slip through. But in September, 1935 Long was assassinated by a man angry at Long's attempt to dislodge his father-in-law from a judgeship. Coughlin went off the deep end by calling the President "anti-God" and a Communist. These diatribes caused the Vatican to censor him, and Coughlin rapidly lost power as he became more and more vitriolic.
The election of 1936 was not even close. Roosevelt carried every state except Maine and Vermont, and carried huge Democratic majorities with him into Congress. The election of 1936 forged a new political coalition that existed through the 1960s. The base of the coalition was the urban masses in the great northern cities. While old-stock Americans in the small towns clung to the GOP, the newer ethnic groups in the cities swung to Roosevelt, mostly out of gratitude for New Deal welfare measures, but partly out of delight with being granted "recognition." During the 1920s one out of every 25 judicial appointments went to a Catholic; under Roosevelt, more than one out of every four. Blacks abandoned the party of Lincoln and went over to the Democratic party for the same reasons. The Wagner Act insured the union vote, and thousands of middle-class people supported the Democratic party because its legislative program had saved their savings, house, business, or farm. The "Solid South" remained in the Democratic column.
Understand why the New Deal ended.
Five events combined to help bring an end to the New Deal after the election of 1936--Roosevelt's scheme to "pack" the U.S. Supreme Court; a rash of sit-down strikes by labor; the recession of 1937; Roosevelt's attempt to "purge" conservative Democratic congressmen; and, most importantly, World War II.
The Supreme Court, by 5 to 4 votes, had declared the first AAA, the NIRA, and state laws establishing minimum wages unconstitutional. The Constitution does not specify the number of justices on the Supreme Court. Congress has varied the number of judges from 5 to 10. Since 1869, the figure has been set at nine. Roosevelt believed that the only way that he could insure that his New Deal programs would pass judicial review was to increase the size of the Supreme Court. In February, 1937 he asked Congress for the power to appoint an additional judge for each judge who did not retire on reaching seventy years of age. A public outcry broke out that Roosevelt was attacking the principle of separation of powers. Politicians who had feared to oppose his economic policies, because they anticipated voter disapproval, now had the perfect justification for breaking with the President.
In March, in a 5-4 decision the Court upheld a Washington minimum-wage law similar to a New York statute it had erased earlier. Two weeks later the Supreme Court, again in a 5-4 vote, ruled the Wager Act constitutional. As someone said at the time: "a switch in time saves nine." In May, one of Roosevelt's chief opponents on the Court retired and the President now had a 6-3 majority on the Court. Yet Roosevelt refused to give in on his court packing scheme and it was not until July, 1937 that it was finally killed in Congress. The Court fight weakened Roosevelt politically because his opponents learned that they could fight him and survive the next election.
Prior to 1937, when workers went out on strike the owners and managers of factories would hire goons to intimidate the workers and use the police to break the picket line and bring in scab labor. The CIO, under John L. Lewis, came up with the scheme of the sit down strike. Instead of leaving factories, workers in industries such as automobiles and rubber sat down at their machines and refused to leave. Management could not resort to force without destroying the factories themselves, and the workers won major victories. This action frightened many middle-class people who saw this tactic as an attack on private property. They began to believe that the reforms of the New Deal had gone far enough.
In the midst of the Court fight and the sit-down strikes, economic recession set in. Roosevelt, afraid of mounting federal deficits, had cut the relief program sharply in June, 1937. The new social security tax also took money out of the economy. Unemployment jumped from 14 percent to 19 percent, and the per capita gross national product fell from $846 in 1937 to $794 in 1938. It was not until April, 1938 that a new public works program took some of sting out of the recession. In addition, Roosevelt pushed through Congress the Fair Labor Standards Act, which established a 40 hour week and minimum wage of 40 cents an hour. These measures further alienated conservatives. If Roosevelt could be credited for bringing the country out of the depths of the depression, he then had to accept the blame for the recession.
In the off-year elections of 1938 Roosevelt was determined to rid Congress of several conservative Southern Democratic congressmen who had continually opposed his New Deal programs. Roosevelt failed in his attempts. All his major targets won and returned to Washington prepared for vengeance. In addition, Republicans picked up enough seats in Congress to combine with the conservative Southern Democrats to effectively block further changes in American society.
It was World War II that ultimately ended the New Deal. In September, 1939 Germany invaded Poland and the war began. Very quickly the United States became the "arsenal for democracy," and as Roosevelt himself said: "Dr. New Deal became Dr. win the war." Unemployment dropped from 17.2 percent in 1939 to 4.7 percent in 1942 as war orders poured into U.S. factories.
Understand the impact of the New Deal on American society.
Franklin Roosevelt greatly expanded the President's legislative functions. Unlike previous administrations, by the end of Roosevelt's tenure in the White House, Congress looked automatically to the Executive for guidance; it expected the administration to have a "program" to present for consideration. Roosevelt created the Executive Office of the President in September 1939. This executive order set up an Executive Office in the White House that in later years would include such pivotal agencies as the Council of Economic Advisers, the National Security Council, the Bureau of the Budget, and the Central Intelligence Agency. This action gave the President tremendous control over the government decision-making process.
For the first time for many Americans, the federal government became an institution that was directly experienced. More than state and local governments, it came to be the government, an agency directly concerned with their welfare. Under the New Deal the national government assumed the responsibility for guaranteeing every American a minimum standard of subsistence. The programs of the New Deal consciously sought to make the industrial system more humane and to protect workers and their families from exploitation.
The New Deal left many problems unsolved and created some perplexing new ones. It never demonstrated that it could achieve prosperity in peacetime. It enhanced the power of interest groups. It did not evolve a way to protect people who had no such spokesmen, nor an acceptable method for controlling the interest groups. The New Deal achieved a more just society by recognizing groups which had been largely unrepresented--staple farmers, industrial workers, particular ethnic groups, and the new intellectual-administrative class. Yet this was still a halfway revolution; it swelled the ranks of the bourgeoisie but left many Americans -- sharecroppers, slum dwellers, most blacks -- outside the system.
Roosevelt and the New Dealers understood that they had come only part of the way. Only five years separated Roosevelt's inauguration in 1933 and the adoption of the last of the New Deal measures in 1938. As Mrs. Roosevelt said in 1939: "I believe in the things that have been done. They helped but they did not solve the fundamental problems . . . I never believed the Federal government could solve the whole problem. It bought us time to think."
Go on to XII. World War II
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