On October 29, 1929, a date named Black Tuesday marked the greatest stock market crash the United States had ever seen. It had devastating effects on the United States and virtually every other country in the world. The United States suffered through hard economic times until 1941, when the Depression officially ended. There is a lot of debate on what ended the Great Depression, some say FDR’s “New Deal” programs got the economy rolling again; others credit it to World War II. Without Franklin Delano Roosevelt’s “New Deal”, the United States would have never recovered as fast as it did.
What caused the Great Depression? Many children ask this question to their grandparents when they hear them recall their experiences during that decade. The Great Depression resulted from all of the borrowing by the banks in the “Roaring Twenties”. “The 1920s ‘boom’ enriched only a fraction of the American people. Earnings for farmers and industrial workers stagnated or fell” (“The Great Depression…”). This was due to lower production costs to run companies. The effect of this was that middle class Americans had to cut down on the products they bought during the late 1920s.
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Economists during this time period truly believed the stock market could not go down. They believed America had not hit its peak financially and the market would continue to climb. Even though the government warned investors and banks on the dangers of buying on margin, it still became very popular. According to the article, “The Stock Market Crash of 1929,” B. Taylor defined margin buying by saying: Margins were generally around 50% at the time–that is, a lay investor could give his broker only 50% of the value of the stocks he wanted to purchase and the broker would put up the rest of the money.
The investor would then pay interest on the loan that the broker gave him–the 50% value of the stocks. If the stocks increased in value then the investor got to keep all of the profit. When he sold he would pay off his debt to the broker. If the value of the stocks were to decrease below 50% (or some set level) of the price that they were bought at, there would be a “broker’s call” where the investor would have to give more money to the broker or sell the stock and pay off his debt. Basically when buying on margin, the stock is used as collateral.
When the stock loses money and falls below the margin, money is still owed to the broker. Once well-known economists warned that this “Bull Market” or rise in stocks was on the verge of ending and sold their shares back into the stock market, investors grew weary. This caused a week long collapse in the stock market, due to other investors following suit. Stock prices fell and fell, lowering the prices per share below the margin. As a result, bankers started calling investors, asking for their money back. Investors had to sell everything to pay back their debts, and many could not pay them back at all.
Thousands of banks failed as a result. Businesses closed, as they were unable to get credit (“The Great Depression…”). By 1932 with the country in economic shambles, something had to change to attempt to battle the growing panic and poverty in the nation. The Election of 1932 brought about a change in regime to the American government. Franklin D. Roosevelt, a democrat, defeated republican incumbent Herbert Hoover by a large margin. FDR promised a “New Deal” to fight the Depression. The “New Deal” programs developed more jobs to battle the climbing unemployment rates.
Some of Roosevelt’s programs were the Agricultural Adjustment Act, Civilian Conservation Corps, and the Social Security Act. The impact of Roosevelt’s programs can still be felt today. Without the “New Deal”, social security and the Federal Deposit Insurance Corporation would not exist. Each program of the New Deal had an intricate position to play in the resurrection of the United States of America’s economy. The Civilian Conservation Corps or CCC was created to fight unemployment. “The CCC was responsible for building many public works and created structures and trails in parks across the nation” (Kelly).
Another popular program was the TVA or Tennessee Valley Authority. Martin Kelly describes the TVA as this, “The Tennessee Valley Authority was established in 1933 to develop the economy in the Tennessee Valley region which had been hit extremely hard by the Great Depression. ” Some of the jobs these workers performed were the building of roads, dams, and the planting of trees. The Social Security Act was another program created by FDR. It created pensions for retirees and gave consumers the confidence to spend more money. These types of jobs improved towns and brought money into worker’s pockets.
One of the theories on how the Great Depression weakened is Franklin Roosevelt’s FDIC program. This program helped stabilize the banking system and gave Americans confidence to put their money back into accounts. The government achieved this by guaranteeing deposits up to $100,000. Before this program, citizens were withdrawing money and hiding it inside their homes because they lost their faith in the government banking system. Once money started flowing into the banks again, the banks started investing and exchanging money, as a post office would exchange mail.
The more money that was pumped in would begin to increase the money that would begin to pump out. Banks are the most important aspect to the economy. They control everything from investing, to loans, and even bonds. Earlier it was stated that the banks failing started the Great Depression. After FDR was able to nail in the banking system by preventing banks from collapsing, the economy began to take its course in the right direction. A common argument against that theory is that it was World War II, not FDR’s legislation, that ended the Great Depression.
According to David Wheelock, it was not until World War II the unemployment rate finally went below 10%. This was a result of soldiers being drafted and going off to war. A common misconception of this is that the economy was much better off once this occurred because there were more jobs available to the Americans. However, this still affected the economy. Many high scale jobs were left empty after male businessmen were drafted to fight over in Europe. In essence, the only people who benefited from the war were factory workers, who were able to create military supplies for capital.
World War II put a cloud over the economy and tricked people into thinking the economy was recovered, when in reality it was not (Drum). What this means was that the war temporarily stunted the Depression’s large unemployment rate, but did not really help improve the economy. Between the years of 1933 and 1937, Roosevelt’s first term in office, when the “New Deal” was in full swing, the largest peace time expansion in American history began to take place. Saying that F. D. R. ‘s programs hurt the economy and did nothing towards recovering the nation does not support all of the evidence that is showing the complete opposite.
In the article, “How FDR’s New Deal Harmed Millions of Poor People,” Jim Powell argues that the New Deal did not save Americans and get them out of the Great Depression. He stated: The most important source of New Deal revenue were excise taxes levied on alcoholic beverages, cigarettes, matches, candy, chewing gum, margarine, fruit juice, soft drinks, cars, tires (including tires on wheelchairs), telephone calls, movie tickets, playing cards, electricity, radios — these and many other everyday things were subject to New Deal excise taxes, which meant that the New Deal was substantially financed by the middle class and poor people.
Yes, to hear FDR’s “Fireside Chats,” one had to pay FDR excise taxes for a radio and electricity. What Jim Powell is forgetting, however, is that during the 20s and 30s those items were considered “luxury” items. Smoking cigarettes was a fad and people with money bought them. Once the Depression set in and people became poor, they were unable to afford these privileged items. Therefore, it is false to say that these excise taxes hurt the middle and poorer classes. Franklin Roosevelt also instituted an increase in income tax that damaged the nation some arguers say.
According to Burton Folsom Jr. , the increase in taxes on the wealthy hurt the economy more than it gained. “In 1941 FDR even proposed raising the top rate to 99. 5 percent on all income over $100,000 (but ended up settling for 90 percent). Not surprisingly, entrepreneurs were stifled and refused to invest and have their capital confiscated” (Folsom 2). Burton Folsom is saying that for every dollar earned after earning $100,000, the government would take ninety cents. While this statement is completely valid, it fails to point out one thing.
Back in the 1930s, inflation was very low. Different types of goods were a lot cheaper than they are now. While it seems crazy to tax someone that much, thinking about the times puts it in much better perspective. According to an inflation calculator, in 1930, $100,000 would have as much buying power as $1,358,616. 77 in 2011 (“CPI Inflation Calculator”). Looking at the facts closely show that while the income tax was abnormally high, it did not affect any families that could not afford to pay the tax. Another counter-argument is that there are always going to be eople who oppose policies and try to avoid paying taxes. However, even by only having half the wealthy Americans pay the increased income tax it still gave the Federal government a huge surplus in money. While they lose some money from the people who horde their supply, in the long run revenue is still increasing from the people who actually do pay the tax. FDR used this extra money to fund military spending on the creation of war ships and attack airplanes. The extra military vehicles/weapons were leased to Britain, France, and Russia which is known as the Lend-Lease Act (“Lend-Lease”).
What the Lend-Lease Act did was lease off war supplies to the allies in exchange for payment on them years later with interest. When all of this capital began to slowly roll in, the economy began to reap its benefits. It is true that WWII aided in the recovery from the Great Depression. It battled the debt and created an influx of jobs in the work force. However, without FDR’s policies in effect, the Great Depression may have gone on for decades to come. World War II was not as influential as the policies initiated by the Democrats were (Boudreaux).
FDR gave the country many things during his presidency. This consists of a strong banking system, stabilized by the FDIC, the multiple “New Deal” programs, CCC and Social Security Act to be specific, and most importantly strong leadership. Franklin Delano Roosevelt was able to put out the fire that is the Great Depression that was slowly consuming the nation; with the help of his mostly Democratic Congress of course. As a result, FDR went down as one of the greatest presidents in American history. Works Cited Boudreaux, Don. “World War II Cured the Great Depression?
Unlikely. ” cafehayek. com. Cafe Hayek, 22 Oct. 2008. Web. 17 Oct. 2011. “CPI Inflation Calculator. ” http://146. 142. 4. 24/cgi-bin/cpicalc. pl? cost1=100%2C000&year1=1930&year2=2011. CPI Inflation Calculator, n. d. Web. 27 Oct. 2011. Drum, Kevin. “The Economy and World War II. ” motherjones. com. Mother Jones, 31 Aug. 2011. Web. 17 Oct. 2011. Folsom, Burton Jr. “Three Myths of the Great Depression. ” Foundation For Economic Education, Sep. 2004: 1-3. Print. “The Great Depression and New Deal, 1929-1940s. ” iws. collin. edu. Collin County Community College, n. . Web. 17 Oct. 2011. Kelly, Martin. “Top 10 New Deal Programs. ” americanhistory. about. com. About. com, n. d. Web. 27 Oct. 2011. “Lend-Lease. ” u-s-history. com. United States History, n. d. Web. 27 Oct. 2011. Powell, Jim. “How FDR’s New Deal Harmed Millions of Poor People. ” cato. org. The Cato Institute, 29 Dec. 2003. Web. 17 Oct. 2011. Taylor, B. “The Stock Market Crash of 1929. ” fundamentalfinance. com. Fundamental Finance, 2006. Web. 20 Oct. 2011. Wheelock, David. “Q. ” stlouisfed. org Federal Reserve Bank of St. Louis, n. d. Web. 14 Oct. 2011.