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American History II


The Great Depression and the New Deal

            The stock market crash of 1929 was an indication of underlying problems in the U.S. economy, but not the sole cause of the Great Depression. The Crash merely made the cracks in a very superficial American prosperity more obvious. Because the causes of the economic crises were complex, the solution would be complicated as well. After the Great Crash, the American public sought a "scapegoat" for the economic collapse. Some held President Hoover responsible; others targeted the brokers, bankers, and businessmen. But the cause of the Great Depression could not be attributed to one individual or even a group of people. The roots of the Great Depression were in the very structure of the American economy, namely extremely unequal distribution of wealth and income, unequal distribution of corporate power, a bad banking structure in the U. S., problems with foreign countries paying their debts to the U. S., and poor economic intelligence.

            Despite rising wages overall, income distribution was extremely unequal. Gaps in income had actually increased since the 1890s. The wealthiest one percent of the population had incomes 650% greater than the poorest ten percent. The tremendous concentration of wealth in the hands of a very few people meant that entire the American economy was dependent on the heavy stock market investment and the luxury spending of the rich. However, both high spending and high investment are very susceptible to fluctuations in the economy; they are much less stable than people's spending on necessities like food, clothing, and shelter. Therefore, when the market crashed and the economy responded by stumbling, both big spending and big investment collapsed.

            From the late 1870s on, there had been an increasing number of consolidations and mergers of corporations. During World War I, many potential competitors were merged into huge corporations like General Electric, making competition nearly nonexistent. The form of these merged corporations had changed some when compared to the corporate forms that existed before World War I. There were fewer trusts, those combinations of companies formed specifically to reduce competition and fix prices, and more holding companies, companies formed to control other, subsidiary companies. In 1929, a mere two hundred of the largest corporations controlled fully half of the corporate wealth in America. This concentration of corporate wealth meant that if just a few companies went into bankruptcy after the Crash, the whole economy would suffer.

            In the 1920s, new banks were opening at the rate of four or five per day. There was no central banking system and there were few federal restrictions to determine how much start-up capital a bank needed or how much of its reserves it could lend. As a result, most of these banks were under-capitalized and retained too few reserves. Many banks were allowed to issue banks notes, promises to pay the bearer the face value of the note in gold. All his life, my father carried such a bank note, issued by a small bank in La Grange, Indiana, on the day he was born, promising to pay the bearer ten dollars in gold on demand. If too many notes were redeemed or too many depositors made withdrawals and the bank did not have the reserves to pay them off, or if too many borrowers defaulted on their loans, a bank would fail. Between 1923 and 1929, banks closed at the rate of two a day. The La Grange bank issuing the bank note my father carried was among them. Think about how unstable a banking system was if four or five new banks were opening every day and one or two of those already opened went bankrupt! Until the stock market crash in 1929, prosperity had covered up the very serious flaws in the banking system.

            World War I had changed the United States from a debtor nation into a creditor nation. In the aftermath of the war, the United States was owed more money (by both its victorious Allies and the defeated Central Powers) than the U. S. owed to foreign nations. The Republican administrations of the 1920s insisted on payments in gold bullion, but the world's gold supply was limited. By the end of the 1920s, the United States itself controlled most of the world's supply. Besides gold, which was increasingly in short supply, countries could pay their debts in goods and services. However, the protectionist policies of the United States had created high tariffs, which, in turn, kept foreign goods out of the U.S. The Hawley-Smoot Act of 1930 set the highest schedule of tariffs ever passed up to that time. As it happened, our protectionism had a negative effect on its own exports. Foreign countries could not pay their debts in gold and also could not pay them by exporting to the U. S. In addition, they also had no money to buy American goods.

            Most American economists and political leaders in 1929 still believed in laissez faire and the "self-regulating" economy. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses obviously couldn't keep up high employment for long when they were not selling goods. There was also a widespread belief that if the federal budget were balanced, the economy would bounce back. A balanced budget demanded no further tax cuts (although Hoover did ask Congress to lower taxes) and no increase in government spending. Such a policy was disastrous in light of rising unemployment and falling prices. Another problem with economic practices of the day was the commitment of the Hoover administration to remain on the international gold standard. Many suggested increasing the money supply and devaluing the dollar by printing paper money not backed by gold, but Hoover refused. Going off the gold standard was one of the first actions of new President Franklin Delano Roosevelt in 1933.

            Franklin D. Roosevelt (1882-1945) was President of the United States from 1933 until 1945. He was the only President to be reelected three times. When he ran for President, Roosevelt was Governor of New York. His major campaign theme was the promise of a New Deal for the American people. The Roosevelt administration of the 1930s was marked by relief programs, measures to increase employment, and aid for industrial and agricultural recovery from the Depression. Americans who lived through the Great Depression and World War II have very strong feelings about Roosevelt, whether those feelings are positive or negative. CNN 's Daniel Schorr, who went to college with the help of a New Deal program, once wrote "It is my contention that no one should be allowed to write about FDR who did not experience that era. It really is one of those cases of you had to be there. Roosevelt may be a myth . . . today, but 60 years ago that myth looked more like hope. In his fireside chats, he turned our Filch radios into shrines, and when he said that America could not afford to live with one-third of a nation ill-housed and ill-fed, we thought he would do something about it. And he did." ("The FDR 'Myth': You Had To Be There," Christian Science Monitor 25 Oct. 1996: 19.)

            The presidential campaign of 1932 was not merely a clash of two personalities. President Hoover himself said, "This campaign is more than a contest between two men. It is more than a contest between two parties. It is a contest between two philosophies of government." The two candidates disagreed on everything from Prohibition to direct government intervention in the economy. Roosevelt advocated a repeal of the Eighteenth Amendment, while Hoover advocated retaining it. Roosevelt took a strong stand on using public power and resources to aid the public; but, catering to the economic wisdom of the day, he promised to reduce federal expenses and promised to balance the budget. Roosevelt did not explain how the government could both aid the public and balance its own books while operating on a reduced budget, but the American public trusted him. On Election Day in 1932, 57.4% of the electorate voted for Roosevelt. (Probably a third of these could be more accurately said to be voting against Hoover). Roosevelt described himself as a Democrat with a capital D, a Christian with a capital C, a Wilsonian in foreign affairs, and a gentleman (i.e., a person from an upper-class family well schooled in the manners of the Victorian era and also well educated at an Ivy League school).

            Roosevelt was charming and very successful in using radio to bring his message to the American public, making him the first modern media President. But he also knew his own limitations as a man of ideas, so he chose well qualified intellectuals and business people for his staff. This so-called "Brain Trust" included many of the most highly regarded individuals of the times; it also included a woman, Frances Perkins, who became the first woman to serve in the Cabinet. But Roosevelt himself was a pragmatic politician, not an intellectual or idealist. He seemed to have a knack for knowing what the public would and would not accept. He carefully chose his policies from the suggestions of members of his "Brain Trust," based on which seemed most likely to be politically viable. One example of FDR's pragmatic use of the presidency--and of the public's faith in their leader--was the National Bank Holiday. By the time he came to office in March of 1933, 5,000 banks had failed and 47 of the 48 states had declared "bank holidays," stopping some or all bank activity. Some liberal members of Congress wanted Roosevelt to nationalize the banks (a move that would have made the government the owner of the nation's banks), but he had no intention of taking such a radical step. Instead, he declared a "national bank holiday," closing all banks, purportedly in order to give bank examiners time to review their solvency. He declared that only those banks found to be financially sound, those which had passed inspection, would be allowed to reopen. A few banks were not permitted to re-open. Most banks were only closed for ten days, not nearly enough time for all of them to be reviewed by the existing corps of bank examiners, so only a very few could actually have been investigated. Nonetheless, when the banks reopened, the American public trusted them once again and deposited their money once again. This, of course , had the effect of actually making the banks solvent. By restoring public confidence in the banking system of America, Roosevelt saved the banking system at no cost to either the bankers or to the government.

            At the beginning of his administration Roosevelt convened Congress in a special session and launched the New Deal with an avalanche of administration-proposed bills. This period came to be known as the "Hundred Days." (Later, Americans came to expect presidents to introduce their "signature" proposals during the first three months after their inaugurations.) Roosevelt was introducing a new notion of the presidency wherein the president, not Congress, was the legislative leader. Most of the bills he proposed set up new government agencies, sometimes called the "alphabet soup" agencies because of the array of acronyms (WPA, PWA, CCC, AAA, etc.) by which they came to be known.

            AAA (Agricultural Adjustment Act) was designed to help American farmers by stabilizing prices and limiting overproduction. The AAA initiated the first direct subsidies (cash payments) to farmers who did not plant crops. The Supreme Court later declared it unconstitutional and an unnecessary invasion of private property rights. Subsequently, with a different attitude and some different justices on the Supreme Court, such programs were re-adopted, as were programs restricting the number of acres of a subsidized crop that a farmer could plant. Today, approximately half of all farm profits come from government subsidy payments of one kind or another.

            CCC (Civilian Conservation Corps) was one of a number of public works projects. It operated under the control of the United States Army, which was designed to promote environmental conservation while getting young, unemployed men off city streets. Recruits planted trees, built wildlife shelters, stocked rivers and lakes with fish, and cleared beaches and campgrounds. The CCC housed the young men in tents and barracks, gave them three meals a day, and paid them a small stipend. The experience younger army officers received in training and managing large numbers of civilians would prove invaluable in managing huge numbers of draftees World War II.

            TVA (Tennessee Valley Authority) was one of the of the most ambitious federal projects. The TVA built dams and power plants and brought electric power to rural areas in seven states along the Tennessee River. Private power companies were outraged by the government going into competition with them, although private power companies were unable to serve most of the TVA's customers. For many Americans, the TVA provided the first chance for getting electricity. In addition, the TVA gave work to thousands of unemployed construction workers.

            NIRA (National Industrial Recovery Act) established the NRA (National Recovery Administration) to stabilize prices and production by having American industries set up production codes. These codes were to be enforced by the federal government. In return for their cooperation with the government, corporations were promised that all anti-trust legislation would be suspended. Section 7A of the NIRA recognized the rights of labor to organize and to bargain collectively with management. The NIRA was the most controversial piece of legislation to come out of the Hundred Days and was often labeled "un-American," "socialist," and even "communist," although it left intact both the private ownership of the means of production and the existing wage system.

            Whether or not it was radical, the NIRA ultimately failed for three reasons. The first was that the NRA administrators assumed that business would comply with the codes they helped to establish. The codes, established in the interest of protecting workers and consumers, were ultimately designed by the largest companies. They hurt small businesses. Second, the rights of labor to organize, established by Section 7A were never respected. And because of the number and complexity of the codes, the right to collective bargaining was never enforced by the federal government. Finally, the NRA attacked recovery from the wrong direction. It defined the problem as a need for stable prices instead of what it actually was: a need to put purchasing power in the hands of American consumers. Its own failure to enforce collective bargaining meant that wages for those working would not rise, and, therefore, that purchasing power would not increase. NIRA had already failed by the time it was declared unconstitutional by the Supreme Court (the same very conservative Court that declared the AAA and a number of other New Deal programs unconstitutional).

            During his first two years in office, Roosevelt promoted a new vision of the executive branch. The presidency became more than a position of chief administrator and became a more active and directive position. This was achieved largely by the president himself cultivating constituencies that looked to him for political action in their behalf. Roosevelt viewed himself as an "honest broker" who would negotiate among competing interests and mediate conflicts while balancing the interests of one group against another. His older cousin, Theodore Roosevelt, had held a similar idea of the presidency; but Franklin Roosevelt expanded this concept of "the broker state." There are two inherent flaws in such a role for the president, however. One is that presidents tend to get weaker the longer they are in office because interest groups gradually become alienated when they do not get everything they want. The second is that the strongest group can put pressure on even the strongest broker. This was true in FDR's administration; the NIRA and AAA clearly benefited big business and big agriculture, often at the expense of small businessmen and small farmers.

            Roosevelt's first eight years in office can be roughly divided into two periods: The First New Deal (1933-1935) was characterized by relief for the immediate problem of unemployment and lack of income. This was a sort of "Band-Aid" phase. The Second New Deal (1935-1937) was characterized by reform. Increasingly, members of Congress and others were calling for a fundamental reform of society itself, not just relief of the problems. The "welfare state" began to emerge in the second administration. By the end of the decade of the 1930s, the Depression was beginning to abate. But it would take World War II and the tremendous production effort necessary to sustain the war effort to ultimately end the Great Depression.

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