Analyze the economic problems of the Great Depression and the attempts by the government to generate economic recovery. Outline the government’s strategy in dealing with the Great Depression starting with the Hoover administration and ending with WWII.
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The problems of the Great Depression were myriad, but unprecedented, so no one knew what to do about them.
Farmers posed the biggest problem. During World War I there had been great demand, and that had boosted prices. During the 1920s that demand dried up, while at the same time production soared as the result of mechanization. This caused a drop in prices, and at the same time the farmers who mechanized needed to pay off the loans to buy all that machinery. This led to a situation in the Agriculture industry that was insustainable. Prices were dropping too fast for the increase in production to compensate leaving farmers broke, and indebted.
In other industries a similar problem developed but much more slowly. Although wages were rising, they weren't rising fast enough to compensate for inflation of consumer prices. This led to a very warped economy. Some people staved off the inevitable using credit, but that was only a stopgap measure and in October 1929, it proved not enough.
Even the Stock Market was in sorry condition. Although stocks and other securities were being traded like "hotcakes" many of these transactions were backed by loans, and so were worthless. Many people had sunk their life savings into this speculative market, seeking big payoffs. There were also many "false" traders offering investments that were nothing more than Ponzi Schemes.
The Stock Market Crash was the point where everything fell apart. Many had lost their money to the Crash. People decided to stop spending and investing as a result of the crash. This led to the corporations that had made loans to foreclose, and that led to people ending up underwater in their loans. Soon runs on the banks began, and that only compounded the problems. As businesses failed this led to people being laid off in droves. And this led to even less consumer spending, so the means to end this vicious cycle wasn't there.
Hoover's first reaction to this was to do nothing. Past recessions and depressions had run their course in the past, and been solved without any Government intervention. However, unlike the past recessions and Depressions, the Great Depression had struck so widely, and deeply that doing nothing was not an option.
In 1932 Hoover approved the creation of the Reconstruction Finance Corporation (RFC). The RFC loaned money to banks, insurance companies and other key industries to retain and restore jobs, and stop the loan foreclosures. This would restore the consumer spending that would then enable the industries to pay off the loans. Unfortunately, this was too little too late.
FDR expanded the RFC with the Emergency Banking Relief Act. Glass-Steagall curbed speculation by banks, and created the FDIC. FDR's New Deal piece by piece addressed all the factors that led to the Depression, and correcting the inequities resulting from it, this ultimately made the economy ready to take off when World War II came to the USA.
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