GED Social Studies Practice Test: The Great Depression and The New Deal

Booms and busts are a permanent feature of the business cycle in capitalist economies. Since the beginning of the Industrial Revolution early in the nineteenth century, the United States had experienced recessions (called “panics”) at least once every twenty years (1819, 1837, 1857, 1873, 1893, and 1907). But none was as severe as the Great Depression, which was triggered by the stock market crash of 1929.  The country would not recover from the depression until World War II put American factories and people back to work.

 

Causes of the Depression

The downturn began slowly. After 1927 consumer spending declined, and housing construction slowed. Soon manufacturers’ inventories piled up; in 1928 they began to cut back production and lay off workers, reducing incomes and buying power and reinforcing the slowdown. By the summer of 1929, the economy was clearly contracting.

Stock Market Speculation and the Great Crash: The stock market of the 1920s was seen by many as a casino in which you couldn’t lose. By 1929 the stock market had become the symbol of the nation’s prosperity, an icon of American business culture. In a Ladies’ Home Journal article titled “Everyone Ought to Be Rich,” financier John J. Raskob advised that $15 a month invested in sound common stocks would grow to $80,000 in twenty years.

Not everyone was playing the market, however. Only about 4 million Americans, or roughly l0 percent of the nation’s households, owned stock in 1929.

Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, rising on average over 40 percent. At the time market activity was essentially unregulated. Margin buying was a common practice. You paid for some of the stock up front, and took a loan (often from the broker) for the rest of the price. If the stock went up, you could sell and make a profit. But, of course, if the stock price falls, you’re stuck with a loss in value and a loan to pay back.

But then on “Black Thursday,’ October 24, 1929, and again on “Black Tuesday,’ October 29, the bubble burst. On those two bleak days, more than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves heavily in debt, began to sell their stock portfolios. Waves of panic selling ensued. Practically overnight stock values fell from a peak of $87 billion (at least on paper) to $55 billion.

Structural Weaknesses: Although the stock market of October 1929 crash triggered the Great Depression, long-standing weaknesses in the economy also contributed to the economic collapse.

Agriculture, in particular, had never recovered from the recession of 1920 and 1921. Farmers faced high fixed costs for equipment and mortgages, which they had incurred during the inflationary war years. When prices fell because of overproduction, many farmers could not make their mortgage payments, and their farms were seized by the banks. Because farmers accounted for about a fourth of the nation’s employed workers in 1929, their difficulties weakened the general economic structure.

Certain basic industries also had economic setbacks during the prosperous 1920s. Textiles, facing a steady decline after the war, abandoned New England for cheaper labor in the South but suffered still from decreased demand and overproduction. Mining and lumbering, which had expanded in response to wartime demand, confronted the same problems. The railroad industry, damaged by stiff competition from the new trucking industry, faced shrinking passenger revenues and stagnant freight levels, worsened by inefficient management. While these older sectors of the economy faltered, newer and more successful consumer-based industries, such as chemicals, appliances and food processing, were strong enough to lead the way to recovery.

Unequal Distribution of Wealth: The unequal distribution of the nation’s wealth was another underlying weakness of the economy. During the 1920s the share of national income going to families in the upper- and middle-income brackets increased. The tax policies of Secretary of the Treasury Andrew Mellon contributed to a concentration of wealth by lowering personal income tax rates, eliminating the wartime excess-profits tax, and increasing deductions that favored corporations and the wealthy. In 1929 the lowest 40 percent of the population received only 12.5 percent of total family income, while the top 5 percent of the population received 30 percent. Once the depression began, this skewed income distribution left the majority of people unable to spend the amount of money that was needed to revive the economy.

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The Depression Begins

When the stock market crashed in October 1929, President Herbert Hoover, who had taken office only seven months before, urged everyone to remain calm. Few people did. People went to their banks to remove their deposits. This “run on the banks” caused many banks to fail, as they did not keep enough money on hand to cover all of their deposits. As banks failed, the panic among the American people increased, and the economy continued to tumble. President Hoover’s reassurances were ignored.

 

The New Deal

By 1932, the country was rudderless and desperate. One in four Americans was out of work. Children went hungry. The American way of life had collapsed. President Herbert Hoover, who firmly believed in the power of the free market, never exercised the leadership needed to get the country back on track. In that year’s presidential election, voters turned to Franklin Delano Roosevelt (FDR), the governor of New York, who called for a “New Deal” for the American people (and the repeal of Prohibition). FDR won in a landslide.

 

The Political Philosophy of FDR

Roosevelt believed the purpose of government was to help people. Up to this point, the most contact people had with the federal government was at the Post Office (or, more unhappily, paying the income tax that had been implemented in 1913). Roosevelt did not believe in laissez-faire (“let it be”) economics. This type of capitalism produced a huge gulf between the haves and the have-nots in the 19th century and, more recently, in the 1920s under three Republican presidents.

Roosevelt’s New Deal rested on three principles: The Three R’s: (1) relief for people who were out of work (By 1932, one in four Americans was unemployed and often hungry and desperate); recovery of the American economy; reform of American business institutions (and the government) to prevent such an economic catastrophe again.

 

The First Hundred Days

During his first 100 days in office, President Roosevelt demonstrated his imagination and determination. Drawing on the talents of a pool of economists and political scientists he had brought to Washington with him, FDR sent Congress a flurry of proposed legislation. One of his first actions was to order all banks to close, in order to stabilize the banking system and stem bank failures. When Congress got down to work, it passed every one of Roosevelt’s proposals.

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Other programs brought construction and power projects to underserved areas, such as the Tennessee Valley; electrification to rural areas; and promotion of construction of homes and office buildings.

 

Reforming Business and Labor Relations

In 1934, Roosevelt asked for, and Congress created, the Securities and Exchange Commission (SEC) to regulate stock markets. The questionable practices of the past, and the capacity to inflict damage on investors, were now outlawed, and the federal government exercised a supervisory role. The SEC still exists today.

The National Labor Relations Act made unionization of all workers legal (see Chapter 3) and guaranteed a union’s right to enter into collective bargaining with management. After the bloody struggles of the 19th century, this landmark legislation marked the legitimization of the labor movement.

 

Social Security

In 1935, Congress passed the bill that created Social Security, which provides pensions for older people. The program is financed by deductions from workers’ paychecks and a tax on employers. FDR’s program was similar to that used in European nations. This is one of the most enduring legacies of the New Deal. Since 1935, the Social Security Administration has not missed a payment — through wars, economic upheaval, and changes in society.

 

Communicating with the Public

FDR was a master of public communication. Instead of formal addresses, he spoke to the American people (over the radio) in what he called “fireside chats.” His easy-to-understand manner and reassuring language help calm a jittery nation. Few presidents before or after have possessed Roosevelt’s talent for connecting with the average person.

 

FDR’s Second Term

Roosevelt won a smashing victory in his bid for reelection in 1936, as many of the New Deal programs were working, though the economy was still fragile. As a result of his “fireside chats” (see above), he was known and loved by millions. In 1936, he won 46 of the (then) 48 states and got more than 60% of the popular vote.

The “Roosevelt coalition” of the Democratic Party — which would last into the 1960s — was comprised of urban dwellers, African-Americans, voters in the South, farmers, ethnic voters, and union members, gave FDR a mandate to continue changing the scope and role of the federal government.

But one year into his second term, Roosevelt made a grave mistake. The Supreme Court had struck down a number of New Deal programs as unconstitutional. The majority of the members of the 9-man Supreme Court were old and conservative. Roosevelt proposed enlarging the court to 15 members (which would allow him to appoint six new judges). Critics claimed that Roosevelt was trying to “pack the court,” and that his attempt to meddle in the affairs of an equal branch of the federal government amount to little more than a dictatorial power grab. The plan was soon abandoned, and eventually, the Supreme Court slowly but surely began to uphold New Deal programs as legitimate exercises of Congressional power.

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Attacks from Liberals and Conservatives

Many liberals felt the New Deal was not radical enough. Some people, such as socialists and communists, believed the government should attack capitalist institutions such as banks and Wall Street firms.

Conservatives, predictably, reacted with horror to FDR’s wide use of presidential powers and the changing role of the federal government. Most of FDR’s critics tended to be wealthy and believe in limited government and laissez-faire economic principles.

 

Organized Labor Finally Wins Long-Sought Rights

The longstanding goals of the labor movement — which had suffered throughout much of the late 19th and early 20th century — were realized in 1938 when Congress passed the Fair Labor Standards Act. This legislation accomplished three major things: (1) a federal minimum wage; (2) a maximum workweek of 40 hours (overtime pay is required for additional work time; and (3) restrictions on labor for persons under the age of 16.

The 1930s was a golden age for unions. Between 1935 and 1940 alone, 5 million workers joined unions, and roughly 1 in 3 industrial workers belonged to a union.

 

The New Deal Winds Down

By 1938, the economy had improved somewhat, but international events in Europe began to overshadow the situation at home. Roosevelt — unlike most Americans, who were still isolationist — worried about the rise of dictatorships in Europe.

After 1938, no more New Deal programs were proposed or enacted. While the U.S. economy was still shaky, there was money to be made in selling arms and ammunition to nations in Europe. In addition, many Americans had become wary of the ever-expanding federal government (and the huge debts it amassed).

 

Life During the New Deal for Various Groups

Women did not enjoy the freedoms they had in the 1920s. Most were hard-hit by the Depression, and the grim economic situation meant that many women no longer had the safety and security they once took for granted. Some men, unable to support their families, disappeared, and many marriages dissolved under the strain of making ends meet. Still, many women participated in New Deal employment programs and were often able to provide for their families.

President Roosevelt was not particularly sympathetic to the concerns of African-Americans. While a few programs had half-hearted attempts to address systematic racism, African-Americans — particularly in the South, where little had changed since the end of the Civil War — did not benefit much from New Deal programs (most of the jobs programs were segregated).

Life for Native Americans remained difficult, but the government urged Indians to work together on tribal farms rather than attempt to farm individual plots of land.  Much land was returned to tribal ownership. Some New Deal work programs enrolled Native Americans.

 

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