Stock market crash of 1929 and economic effects during the 1930s

Stock Market Crash

During the twentieth century, the majority of capital in the United States was represented by stocks, which were sold on stock exchanges, such as the New York Stock Exchange (NYSE) in New York (PBS, 2008). In the 1920s, the stock market saw an unprecedented boom, which drove stock prices to all-time highs. Seen as a sure-fire investment, many people borrowed money to invest in stocks, desperate to get their hands on a piece of that pie.

Unfortunately, their plans did not pan out as they had planned. In 1929, the stock market started to decline. By 1933, it had hit rock bottom, dropping as much as 80% from the 1920's highs.

Naturally, this bust had a negative impact on the U.S. economy. Demand for goods declined because people had lost a lot of money (PBS, 2008). New investment could not be financed by selling stock, because stock was suddenly seen as a bad investment. In addition, the banking system experienced a period of chaos, in which banks were unable to collect on loans to people who had invested in stocks that were now worthless. To make matters worse, many banks had invested customers' money in the stock market and had lost this money. When people caught wind that the banks were in trouble, they started to withdraw their money and close their accounts, making the situation even worse. As a result, hundreds of banks were forced to close.

After the stock market crashed, President Hoover tried to convince U.S. business owners to maintain wages, passed a public works bill to curb government spending, and lent taxpayers' money directly to private corporations (Kennedy, 1999).

According to Kennedy (1999), Hoover was a greatly respected man when he entered the White House in 1929. "To a degree uncommon among Presidents," said Kennedy, "Hoover was a reflective man of scholarly bent, even something of a political philosopher."

Hoover did not take any drastic measures, as he did not fully grasp the severity of the situation. Kennedy observer that "down to the last weeks of 1930, Americans could still plausibly assume that they were caught up in yet another of the routine business-cycle downswings that periodically afflicted their traditionally boom-and-bust economy. Their situation was painful but not unfamiliar, and their President was in any case taking unprecedentedly vigorous corrective actions."

Because Hoover was convinced that the economy was not as troubled as it actually was, his response was insufficient (MSN Encarta, 2008). He truly believed that he simply needed to restore public confidence so businesses would begin to invest and expand production, providing jobs and income to the nation. However, business owners were not as optimistic, arguing that they simply could not invest and produce when their goods were not selling. As a result, by 1932, investment was less than 5% of its 1929 level.

Hoover also tried to restore business confidence by working on a more balanced federal budget (MSN Encarta, 2008). He raised taxes and reduced government spending. Unfortunately, his plan backfired, as demand continued to drop. As conditions worsened, Hoover's administration began giving emergency loans to banks and industry, expanding public works, and helping states offer relief. But the damage had already been done.

Hoover was a firm believer in individualism and self-reliance. He believed that "mutual self-help through voluntary giving" would help alleviate the suffering of the depression (MSN Encarta, 2008). Private giving increased under his administration, reaching a record high in 1932, but charitable organizations were outweighed by the large number of people who needed that help. Government assistance seemed the only answer, but Hoover was reluctant, arguing that federal relief payments would reduce self-reliance and discourage people from helping themselves.

Hoover also supported protective tariffs to block imports and stimulate the American economy by encouraging people to buy American-made products (MSN Encarta, 2008). In 1930, he passed the Hawley-Smoot Tariff, which established the highest tariff in American history. This damaged European economies, which were already in danger of depression. Other nations retaliated by raising their own tariffs. This action helped to worsen and spread the depression by decreasing international trade. Between 1929 and 1932 the total value of global trade had declined by more than half.

When it was time to elect a new president in 1932, Americans were ready for change and eager to embrace a new leader who could help them (Bryant, 1998). The election meant a lot to Americans and to the rest of the world, as national and global economies were in a state of chaos. America elected Franklin Delano Roosevelt and his soothing personality slowly inspired confidence and hope.

By the time Franklin D. Roosevelt became president in March of 1933, the banking system was in despair (PBS, 2008). Americans had seen $140 billion disappear when their banks failed. Businesses could not get credit for inventory. Checks could not be used for payments because no one trusted that the checks were good.

Roosevelt's New Deal began with the simple idea to try something new (Bryant, 1998). He was open to any and all suggestions. Some laws were passed that he did not like, but he signed them to prevent laws he disliked even more, or to avoid holding up other legislation. He felt that action was better than lack of action.

The New Deal had three goals: recovery from the depression, relief for its victims, and reform of the economic system. Much of the legislation reflected all three of these goals. For example, Roosevelt closed all the banks in the United States for three days and then re-opened them with strict limits on withdrawals.

Eventually, confidence returned to the system and banks were able to function again (PBS, 2008). To prevent this disaster from occurring in the future, the federal government created the Federal Deposit Insurance Corporation, which eliminated the rationale for bank "runs" - to get one's money before the bank "runs out." Backed by the FDIC, the bank could close, but then the government would reimburse depositors. Banks were also banned from investing depositors' money in stocks.

Many laws under the New Deal aimed to help the people recover (Bryant, 1998). One law set up a program that provided jobs to hundreds of thousands of young men. Another set up an agency that gave money to states to help the poor. There were also laws that were to aide economic recovery. For example, the National Recovery administration set up rules to control competition between businesses and protect workers who wanted to organize unions. However, it was not successful. It favored large businesses over small ones, and many businesses failed to follow the rules.