The Great Depression: Causes and How the New Deal Prolonged the Depression

Topics: Great Depression, Federal Reserve System, Social Security Pages: 6 (2077 words) Published: September 20, 2003
When Herbert Hoover was inaugurated as the thirty-first President of the United States early in 1929, the nation was enjoying unprecedented prosperity. But by the end of the year, the stock market had crashed and the country was headed for the Great Depression. President Hoover tried to fight the Great Depression, but as he neared the end of his term, the American economy was in its worst state yet, and many fearful citizens wanted a leader who would do more to alleviate the crisis. They found that leader in Franklin D. Roosevelt, who promised the nation a "New Deal" and with that promise won the election of 1932. Roosevelt's New Deal had profound effects upon American history. Although it was intended to restore America's devastated economy, the New Deal actually did little to encourage prosperity.

Causes of the Great Depression.

Easy Credit. Although the American economy thrived in the 1920s, much of this prosperity was based on easy credit. The Federal Reserve Bank kept interest rates low, making it easy for businesses and individuals to take out loans. This policy encouraged people to go into debt. Many people bought new homes, cars, and appliances on installment plans. Instead of paying the full price of an item at the time of purchase, they made a small down payment and then paid monthly installments over a set period of time. As long as people could buy on credit, factories kept busy and jobs were plentiful.

The stock market. The optimism of the era was nowhere more evident than at the stock exchange on Wall Street in New York City. Most factories were owned by shareholders, people who held stocks in the corporations producing the goods. As businesses prospered in the 1920s, stock dividends soared and many people invested in stocks, driving stock prices higher every day.

Risky investments. Some investors practiced speculation , ignoring the true value of stocks, they tried to buy stock while it was going up and then sell it at higher price. Convinced that they could always sell at a higher price, speculators bought and traded stocks at far above their actual value. Stocks, like consumer goods, could also be bought on credit. Some people speculated on borrowed money, gambling that the stock market would continue to thrive. By paying as little as 10 percent of the price of stock in cash and securing a loan to cover the balance, people could hold stock on margin. Margin buyers hoped to sell at a good enough price to repay their loans and still make a good profit. The combination of easy credit and risky investments set the stage for economic disaster.

The Great Crash of 1929.

Signs of a slowing economy. Prices on the New York Stock Exchange, already at a historic high, began to surge upward in the spring of 1928 and, in spite of a few slumps, continued to climb during the first half of 1929. But the careful observer could have seen signs of a slowing economy. In June 1929, industrial production began to decline. A few stockbrokers and economists warned that many stocks were greatly overpriced, and several major investor decided to sell their stocks before prices began to reflect the decrease in production. But most people seemed convinced that the "bull market" of rising stock prices would last forever.

The stock market crash. By the end of September, stock averages had begun to decline steadily. As more and more people began to sell, prices continued to drop. The stock market crash began on Thursday, October 24, when a massive wave of selling sent stock prices spiraling downward and nearly 13 million share of stock changed hands. During the afternoon, several influential banking houses, including J.P. Morgan's company, invested large amounts of money in sagging stocks in an effort to quell the panic. For a few Days, stock prices seemed to stabilize, but on October 29, 1929, remembered as "Black Tuesday," the bottom fell out of the market. Stock prices plunged downward and a record 16 million shares...
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