What did the government do as a response to the stock market crash?

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When the stock market crashed in late 1929, the initial belief among economists was that the economy would quickly bounce back from its drop. When that did not occur, Hoover supported the establishment of the Reconstruction Finance Corporation. This agency was meant to lend money to banks and businesses so...

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When the stock market crashed in late 1929, the initial belief among economists was that the economy would quickly bounce back from its drop. When that did not occur, Hoover supported the establishment of the Reconstruction Finance Corporation. This agency was meant to lend money to banks and businesses so they could stay afloat. Tax cuts and infrastructure projects were also implemented by the Hoover administration to help stimulate the economy and increase employment.

Unfortunately, the Hoover administration underestimated the extent of the collapse. It did not pump enough money into the economy to get it jump started again. Further, this was a period in which it was felt that social welfare programs should be run by the individual states, not by the federal government. (We see this philosophy in play today in President Trump's tendency to let individual states handle the coronavirus crisis on their own.) There were almost no federal safety nets in play during the 1929 crash and after, and states were quickly overwhelmed by the volume of need at a time when tax revenues were plummeting.

Hoover was a well-meaning person, but the magnitude of the crisis overwhelmed him. The need for a federal response worked against his small government philosophy. It took the election of Franklin Roosevelt, who had a willingness to experiment and to use more federal government muscle, to start moving the country away from crisis.

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The government under President Herbert Hoover did very little in response to the stock market crash of October 1929. Part of this is because Hoover generally opposed direct intervention in the economy as a matter of ideology. But it is also important to understand that most economists and policymakers at the time did not see the stock market crash as we do today—as the beginning of the Great Depression. As historian David Kennedy notes, by the end of 1929, "there was very little reason" to view the crash and the slight overall economic downturn that followed as "anything more than a normal dip in the business cycle." So, the Hoover Administration largely responded by making optimistic statements about the situation to assuage investor concerns. Hoover claimed (as did many economists) that the economy was still healthy and that the stock market crash actually put the overall economy on a sounder footing by punishing wild speculation. While most historians are critical of Hoover's response to the Depression, it is important to recognize that most also believe the crash had little to do with the advent of the Depression. One response that could have happened—but didn't until Franklin Roosevelt's New Deal—was legislation that regulated the kind of speculation that led to the crash. The Securities Exchange Commission (SEC) was created in 1934 amid legislation that also restricted margin trading and other abuses that contributed to the crash. But in the short term, there was very little immediate government response.

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As Mkoren has already pointed out, with this question you would need to differentiate between the Hoover and Roosevelt administrations. Hoover was much more conservative economically, and tended to side with the Free Market, so after the Great Depression struck, it is doubtful he would have ever supported the kind of ambitious federal expansion represented by the New Deal. However, as the Great Depression set in, he did try to take steps to address it, opening up building projects such as the Hoover Dam, as well as the federal initiatives previously addressed. Even so, he never supported the kind of large scale deficit spending Roosevelt and his allies were calling for.

By contrast, FDR's New Deal was much more aggressive and much more expansive response to the problem. In addition to the programs aimed at fighting the Depression (which were earlier discussed), the New Deal also sought to reform the US economy, so that the events which caused the Great Depression would not repeat. The SEC was created in 1934 to prosecute insider trading and regulate the stock market. In addition there was the FDIC, through which the federal government would guarantee any bank deposit up to a maximum limit. This was in answer to the Bank Panic.

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When the stock market crashed, our economy went into a depression. At first, the government did very little.  President Hoover believed in a laissez-faire philosophy.  This meant Hoover believed the government should interfere as little as possible in the economy.  For two years, Hoover took little action.  However, in his last year in office, Hoover tried to bring the economy out of the depression. The National Credit Corporation was established to help troubled banks make loans.  The Reconstruction Finance Corporation was created to provide loans to businesses.  The Emergency Relief and Construction Act provided direct relief to people. However, people felt President Hoover didn’t do enough, and he lost the election in 1932 to Franklin D. Roosevelt.

When President Roosevelt took office, he launched many programs to try to help bring the economy out of the depression.  There were new rules for the stock market, and many government programs created jobs. Banks were closed for four days, and only the strongest ones financially were allowed to reopen. Over 15 major programs were passed in Roosevelt’s first 100 days in office.  These actions were part of the New Deal program.

Thus, after a very slow response, the government eventually took action in trying to respond to the crash of the stock market.

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