by Norman Lowe
3 Falling demand for exports
However, exports began to fall away, partly because foreign countries were reluctant to buy American goods when the Americans themselves put up tariff barriers to protect their industries from foreign imports. Although the Fordney–McCumber tariff (1922) helped to keep foreign goods out, at the same time it prevented foreign states, especially those in Europe, from making much-needed profits from trade with the USA. Without those profits, the nations of Europe would be unable to afford American goods, and they would be struggling to pay their war debts to the USA. To make matters worse, many states retaliated by introducing tariffs against American goods. A slump of some sort was clearly on the way.
4 Speculation
The situation was worsened by a great rush of speculation on the New York stock market, which began to gather momentum about 1926. Speculation is the buying of shares in companies; people with cash to spare chose to do this for two possible motives:
to get the dividend – the annual sharing-out of a company’s profits among its shareholders;
to make a quick profit by selling the shares for more than they originally paid for them.
In the mid-1920s it was the second motive which most attracted investors: as company profits increased, more people wanted to buy shares; this forced share prices up and there were plenty of chances of quick profits from buying and selling shares. The average value of a share rose from $9 in 1924 to $26 in 1929. Share prices of some companies rose spectacularly: the stock of the Radio Corporation of America, for example, stood at $85 a share early in 1928 and had risen to $505 in September 1929, and this was a company which did not pay dividends.
Promise of quick profits encouraged all sorts of rash moves: ordinary people spent their savings or borrowed money to buy a few shares. Stockbrokers sold shares on credit; banks speculated in shares using the cash deposited with them. It was all something of a gamble; but there was enormous confidence that prosperity would continue indefinitely.
This confidence lasted well on into 1929, but when the first signs appeared that sales of goods were beginning to slow down, some better-informed investors decided to sell their shares while prices were still high. This caused suspicion to spread – more people than usual were trying to sell shares – something must be wrong! Confidence in the future began to waver for the first time, and more people decided to sell their shares while the going was good. And so a process of what economists call self-fulfilling expectation developed. This means that by their own actions, investors actually caused the dramatic collapse of share prices which they were afraid of.
By October 1929 there was a flood of people rushing to sell shares, but because confidence had been shaken, there were far fewer people wanting to buy. Share prices tumbled and unfortunate investors had to accept whatever they could get. One especially bad day was 24 October – ‘Black Thursday’ – when nearly 13 million shares were ‘dumped’ on the stock market at very low prices. By mid-1930 share prices were, on average, about 25 per cent of their peak level the previous year, but they were still falling. Rock bottom was reached in 1932, and by then the whole of the USA was in the grip of depression.
(c) How did the depression affect people?
To begin with, the stock market crash ruined millions of investors who had paid high prices for their shares. If investors had bought shares on credit or with borrowed money, their creditors lost heavily too, since they had no hope of receiving payment.
Banks were in a shaky position, having themselves speculated unsuccessfully. When, added to this, millions of people rushed to withdraw their savings in the belief that their cash would be safer at home, many banks were overwhelmed, did not have enough cash to pay everybody, and closed down for good. There were over 25 000 banks in the country in 1929, but by 1933 there were fewer than 15 000. This meant that millions of ordinary people who had had nothing to do with the speculation were ruined as their life savings disappeared.
As the demand for all types of goods fell, workers were laid off and factories closed. Industrial production in 1933 was only half the 1929 total, while unemployment stood at around 14 million. About a quarter of the total labour force was without jobs, and one in eight farmers lost all their property. There was a drop in living standards, with people queuing for bread, charity soup kitchens, evictions of tenants who could not afford the rent, and near-starvation for many people. The ‘great American dream’ of prosperity for everybody had turned into a nightmare. In the words of historian Donald McCoy: ‘the American people were affected as though a war had been fought from coast to coast’. There were no unemployment or sickness benefits to help out. Outside large cities, homeless people lived in camps nicknamed ‘Hoovervilles’ after the president who was blamed for the depression.
Many other countries, especially Germany, were affected because their prosperity depended to a large extent on loans from the USA. As soon as the crash came, the loans stopped, and the Americans called in the short-term loans they had already made. By 1931 most of Europe was in a similar plight. The depression had political results too; in many states – Germany, Austria, Japan and Britain – right-wing governments came to power when the existing regimes failed to cope with the situation.
(d) Who was to blame for the disaster?
At the time it was fashionable to blame the unfortunate President Hoover, but this is unfair. The origins of the trouble go much further back, and the Republican Party as a whole must share the blame. There were several measures the government could have taken to control the situation: they could have encouraged overseas countries to buy more American goods by lowering American tariffs instead of raising them. Decisive action could have been taken in 1928 and 1929 to limit the amount of credit which the stock market was allowing speculators. But their laissez-faire attitude would not allow such interference in private affairs.
(e) What did Hoover’s government do to ease the depression?
Hoover tried to solve the problem by encouraging employers not to reduce wages and not to lay workers off. The government lent money to banks, industrialists and farmers to save them from bankruptcy, and urged state governors to create jobs by investing in public works schemes. After a promising beginning the policy began to falter: as the depression got worse, businesses started to break the agreement and lay men off. As for the states, they lacked sufficient funds to create any effective public works.
Hoover’s attempts to help farmers were even less effective. The government began to buy up surplus grain, but this only encouraged them to produce even more, so that the government could not afford to continue the policy; the result – there was even more surplus grain, causing the price to fall further. In 1931 Hoover declared a one-year moratorium on war debts. This meant that foreign governments could miss one instalment of their debts to the USA in the hope that they would use the money saved to buy more American goods. However, this was a failure partly because at the same time the new Smoot–Hawley Tariff put import duties on agricultural produce, making them more expensive than home-grown goods, and so protect farmers from foreign competition. But this backfired: European countries retaliated by introducing their own tariffs, which prevented American farmers from exporting to Europe. Hoover’s efforts made little difference – American exports in 1932 were less than a third of the 1929 total.
Hoover tried to address the problem of the mass closure of banks by setting up the National Credit Corporation. This was designed to persuade large banks to lend money to smaller banks that were in difficulties. But large banks were reluctant to lend money for fear that the smaller banks might collapse, and be unable to pay back the loan. More effective was another new organization – the Reconstruction Finance Corporation (RFC), which was given the power to lend money to banks and provide cash for job-creation programmes. This was beginning to show results towards the end of 1932, but it was too late; the election was due in November 1932. A measure which would have been more helpful was the government making rel
ief payments to individual families. Even in a crisis as serious as this, he was against relief payments to individuals because he believed in self-reliance and hard work, in other words, ‘rugged individualism’. The idea that it was the government’s job to provide for the suffering poor was complete anathema to him, because it would create what he called ‘a dependency culture’. It was no surprise when the Democrat candidate, Franklin D. Roosevelt (‘FDR’), easily beat Hoover in the presidential election of November 1932 (see Illus. 22.1).
Illustration 22.1 The winner and the loser: Roosevelt waves to the cheering crowds, while defeated President Hoover looks downcast during their ride through Washington, March 1933
22.7 ROOSEVELT AND THE NEW DEAL
The 51-year-old Roosevelt came from a wealthy New York family; educated at Harvard, he entered politics in 1910 and was Assistant Secretary to the Navy during the First World War. It seemed as though his career might be over when, at the age of 40, he was stricken with polio (1921), which left his legs completely paralysed. With tremendous determination he overcame his disability, though he was never able to walk unaided. He now brought the same determination to bear in his attempts to drag America out of the depression. He was dynamic, full of vitality and brimming with new ideas. He was a brilliant communicator – his radio talks (which he called his fireside chats) inspired confidence and won him great popularity. During the election campaign he had said: ‘I pledge you, I pledge myself, to a new deal for the American people.’ The phrase stuck, and his policies have always been remembered as ‘the New Deal’. Right from the beginning he brought new hope when he said in his inauguration speech: ‘Let me assert my firm belief that the only thing we have to fear is fear itself. This nation asks for action, and action now. … I shall ask Congress for the power to wage war against the emergency.’
(a) What were the aims of the New Deal?
Basically Roosevelt had three aims:
relief: to give direct help to the poverty-stricken millions who were without food and homes;
recovery: to reduce unemployment, stimulate the demand for goods and get the economy moving again;
reform: to take whatever measures were necessary to prevent a repeat of the economic disaster.
It was obvious that drastic measures were needed, and Roosevelt’s methods were a complete change from those of the laissez-faire Republicans. He gathered advice from a small group of economists and university academics whom he called his Brain Trust. He was prepared to intervene in economic and social affairs as much as possible and to spend government cash to pull the country out of depression. The Republicans were always reluctant to take steps of this sort.
(b) What did the New Deal involve?
The measures which go to make up the New Deal were introduced over the years 1933 to 1940. Some historians have talked about a ‘First’ and a ‘Second’ New Deal starting in 1935, and even a ‘Third’, each with different characteristics. However, Michael Heale believes that this oversimplifies the subject. ‘The Roosevelt administration’, he writes, ‘was never governed by a single political ideology, and its components were always pulling in different directions. Broadly, however, it is fair to say that from 1935 the New Deal moved closer to the political left in that it stumbled into an uneasy alliance with organised labour and showed a greater interest in social reform.’ For the ‘first hundred days’ he concentrated on emergency legislation to deal with the ongoing crisis:
1 Banking and financial systems
It was important to get the banking and financial systems working properly again. This was achieved by the government taking over the banks temporarily and guaranteeing that depositors would not lose their cash if there was another financial crisis. This restored confidence, and money began to flow into the banks again. The Securities Exchange Commission (1934) reformed the stock exchange; among other things, it insisted that people buying shares on credit must make a down payment of at least 50 per cent instead of only 10 per cent.
2 The Farmers’ Relief Act (1933) and the Agricultural Adjustment Administration (AAA)
It was important to help farmers, whose main problem was that they were still producing too much, which kept prices and profits low. Under the Act, the government paid compensation to farmers who reduced output, thereby raising prices. The AAA, under the control of the dynamic Henry Wallace, Roosevelt’s secretary of agriculture, was responsible for carrying out the policy. It had some success – by 1937 the average income of farmers had almost doubled. But its weakness was that it did nothing to help the poorer farmers, the tenant-farmers and the farm labourers, many of whom were forced to leave the land to seek a better life in the cities.
3 The Civilian Conservation Corps (CCC)
Introduced in 1933, this was a popular Roosevelt idea to provide jobs for young men in conservation projects in the countryside. By 1940 about 2.5 million had ‘enjoyed’ a six-month spell in the CCC, which gave them a small wage ($30 a month, of which $25 had to be sent home to the family), as well as food, clothing and shelter.
4 The National Industrial Recovery Act (1933)
The most important part of the emergency programme, the National Industrial Recovery Act, was designed to get people back to work permanently, so that they would be able to buy more. This would stimulate industry and help the economy to function normally. The Act introduced the Public Works Administration (PWA), which organized and provided cash for the building of useful works – dams, bridges, roads, hospitals, schools, airports and government buildings – creating several million extra jobs. Another section of the Act set up the National Recovery Administration (NRA), which abolished child labour, introduced a maximum eight-hour working day and a minimum wage, and thus helped to create more employment. Although these rules were not compulsory, employers were pressured to accept them; those who did were privileged to use an official sticker on their goods showing a blue eagle and the letters ‘NRS’. The public was encouraged to boycott firms that refused to co-operate. The response was tremendous, with well over two million employers accepting the new standards.
5 The Federal Emergency Relief Administration (1933)
Further relief and recovery were provided by the Federal Emergency Relief Administration, which provided $500 million of federal cash to enable the state governments to provide relief and soup kitchens.
6 The Works Progress Administration (WPA)
Founded in 1935, this funded a variety of projects such as roads, schools and hospitals (similar to the PWA but smaller-scale projects), and the Federal Theatre Project created jobs for playwrights, artists, actors, musicians and circus performers, as well as increasing public appreciation of the arts.
7 The Social Security Act (1935)
This introduced old-age pensions and unemployment insurance schemes, to be jointly financed by federal and state governments, employers and workers. However, this was not a great success at the time, because payments were usually not very generous; nor was there any provision made for sickness insurance. The USA was lagging well behind countries such as Germany and Britain in social welfare.
8 Working conditions
Two acts encouraged trade unions and helped improve working conditions.
The Wagner Act (1935), the work of Senator Robert F. Wagner of New York, gave unions a proper legal foundation and the right to bargain for their members in any dispute with management. It also set up the National Labour Relations Board, to which workers could appeal against unfair practices by management.
The Fair Labour Standards Act (1938) introduced a maximum 45-hour working week as well as a minimum wage in certain low-paid trades, and made most child labour illegal.
9 Other measures
Also included in the New Deal were such measures as the Tennessee Valley Authority (TVA), which revitalized a huge area of rural America which had been ruined by soil erosion and careless farming (see Map 22.2). The new authority built dams to provide cheap electricity, and organized conservation, irrigation and
afforestation to prevent soil erosion. Other initiatives included loans for householders in danger of losing their homes because they could not afford mortgage repayments; slum clearance and building of new houses and flats; increased taxes on the incomes of the wealthy; and trade agreements which at last reduced American tariffs in return for tariff reductions by the other party to the treaty (in the hope of increasing American exports). One of the very first New Deal measures in 1933 was the end of Prohibition; as ‘FDR’ himself remarked, ‘I think this would be a good time for beer.’
(c) Opposition to the New Deal
It was inevitable that such a far-reaching programme would arouse criticism and opposition from both right and left. Critics on the left thought that the New Deal didn’t go far enough, while those on the right were horrified at the lengths to which it went.
Businessmen objected strongly to the growth of trade unions, the regulation of hours and wages, and increased taxation. These would encourage socialists and communists and might even lead to revolution. In their view, governments should not interfere so massively in economic affairs, because that would only stifle private enterprise with all the new rules and taxes.
Some of the state governments resented the extent to which the federal government was interfering in what they considered to be internal state affairs.
The Supreme Court claimed that the president was taking on too much power; it ruled that several measures (including NRA) were unconstitutional, and this held up their operation. The nine members were all elderly and were not Roosevelt appointees. However, the Supreme Court became more amenable during Roosevelt’s second term after he had appointed five more co-operative judges to replace those who had died or resigned.
