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IB History of the Americas/Chapter 11

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The Great Depression in the Americas (Topic 11)

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Background to the Great Depression

  • The US’s production in the late 20s were sky-rocketing, stimulated by the automobile, radio, film and other industries. There was a new plateau of prosperity, but few saw what was coming.
  • Prices on the stock market were rising at incredible rates.
  • The crash was partially triggered by the fact that the British had raised interest rates to try and bring back capital lured abroad by American investors.
  • Foreign investors and local speculators decided to sell their “insecure” stocks which led up to a selling frenzy.
  • On October 29th 1929, 16,410,030 shares of stocks were sold; the day was also known as the Black Tuesday.
  • As the supply of stocks in the market increase the price decreases. With low prices for stocks the demand for them decreases and there is less activity in the stock market. People with stocks lose out as the value for their stocks decrease and there is no demand.
  • By the end of 1929 stockholders had lost $40 billion
  • The stock market crash triggered a world-wide depression and by the end of the 30s more than 4 million workers in the US were jobless.
  • Over five thousand banks collapsed in the first three years of the depression and took with them the life savings of tens of thousands of people.

Causes of the Depression

  • The reason for the depression was overproduction in the agricultural and industrial sector.
  • There was too much production and not enough consumption.
  • More money was going into the hands of the wealthy that invested and increased productions, but not enough to the workers in terms of salaries. There was a lack of purchasing power.
  • Another reason was credit through installment; these methods caused many consumers to spend more than they could afford thus bringing them into bankruptcy.
  • The rise in unemployment due to new labor-saving technologies also played a part in the depression.
  • Financial problems abroad also helped to trigger the depression. There was the lack of international trade due to problems facing European nations.
  • Europe had not recovered fully from WW1 and the financial collapse aided to the depression.
  • The Hawley-Smoot Tariff of 1930 was designed as a protective tariff that placed a 38.5% duty on nonfree goods; it was designed to protect the local agricultural industry. The tariff also helped in the decline of international trade.
  • Hoover’s Fight against the Depression
  • Initially began with “Laissez-Faire” policies but moved to more intervention type ones towards the end of his presidency.
  • He fought against schemes that he saw as “socialistic”.
  • Hoover sought to use public works to get the economy running again. He was granted $2.25 billion from Congress for the projects.
  • Hoover Dam (1930 – 1936)
  • In 1932 the Reconstruction Finance Corporation (RFC) was started. It was a government lending bank that provided indirect relief by helping insurance companies, banks, agricultural organizations, railroads and governments. “Pump-Priming”
  • Congress passed the Norris-La Guardia Anti-Injunction Act in 1932 to give more rights for labor. Under the act there would be no “anti-union” acts and unions had the right to do boycotts, strikes and peaceful picketing.

FDR and the New Deal

  • FDR’s New Deal programs aimed at three R’s – Relief, Recovery and Reform.
  • Congress gave FDR extraordinary blank-check powers for his New Deal program.
  • The Emergency Banking Relief Act of 1933 gave FDR the power to regulate bank transactions and foreign exchange and also to reopen solvent banks.
  • He used the radio for his “fireside chats” in which he persuaded the 35 million Americans that it was safe to put their money in reopened banks. People had then started to deposit and banks were opening up once again.
  • The Glass-Steagall Banking Reform Act created the Federal Deposit Insurance Corporation which insured deposits of up to $5000, this further increased the confidence in depositing money and ended several bank failures.
  • The gold standard is a monetary system in which the normal economic unit of account is a fixed weight of gold coin. Under the gold standard, banknote issuers can redeem notes, upon demand, in that amount of gold coin.
  • At the time the gold reserve was declining and to prevent any sort of chaos he forced all private holdings of gold to be surrendered to the Treasury in exchange for paper notes. The value of the currency would become unmanageably high since the price of gold was increasing due to its growing scarcity. He then took the nation off the gold standards to maintain a more “managed economy”.
  • With the new “managed currency”, that was a result of the US leaving the Gold Standard, was aimed to bring about inflation in the economy. Since the price of the dollar was not allowed to increase with the price of gold the prices of goods in the market rose but not the price of dollar; thus resulting in inflation where the price of goods increase. FDR believed that the increased levels of inflation would stimulate new production.
  • However, he brought the country back later to Gold Standards for purposes of international trade only.