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The farm sector of the American economy had struggled in the 1920s, but overall by 1928, the United States had enjoyed eight years of unprecedented prosperity under Republican Presidents Harding and Coolidge. As the 1928 presidential race drew to a close, the Republican candidate, former Secretary of Commerce Herbert Hoover, outlined the Republicans’ governing philosophy, which he credited with producing the prosperity. Seven months after Hoover took office, in October 1929, the stock market crashed. After two weeks, it recovered somewhat, but then began a long-term decline, as the American economy fell into what became known as the Great Depression.
The fall in the stock market and the resulting loss of wealth was not the sole cause of the Depression. Economists still debate what broader effect the stock market crash had on the American economy and why the Great Depression was so severe and so prolonged. Two factors that postdate the stock market crash and are part of the current debate – the decrease in foreign trade and the failure of the banking system – were noted by contemporaries. However, contemporaries tended to agree that the US government should ensure the soundness of the financial system by setting its own financial house in order. This meant reducing its debt by curtailing its expenditures and even raising taxes, if necessary. Today, most economists would consider such measures counterproductive during a depression. High tariffs restricting trade did not encourage recovery, and reductions in government spending removed an economic stimulus that might have helped. (Economic orthodoxy began to change with the publication of John Maynard Keynes’ The General Theory of Employment, Interest and Money, in 1936, which called for governments to increase spending and deficits during a downturn.)
Hoover responded to the economic difficulties according to the principles he had articulated in 1928. The American system was sound, he thought, and would recover with only limited assistance from the government. As the economic situation worsened, however, Hoover did propose a series of measures to deal with the crisis, including the establishment of the Reconstruction Finance Corporation (RFC), a government entity that lent money to state and local governments, banks, and other businesses.
Franklin Delano Roosevelt, the leading Democratic candidate for President in 1932, argued that the American system as championed by Hoover was not sound and needed to be changed.
In a series of speeches in 1932 (The Forgotten Man, his Acceptance Speech at the Democratic Convention, and “Commonwealth Club Address”), Roosevelt explained why he thought the Depression had occurred and what had to be done to restore the country to economic health. This was the “New Deal” that Roosevelt offered the American people.
In his final weeks in the Oval Office, as the economic crisis reached its most severe stage, Hoover argued that President-elect Roosevelt had made the situation worse by refusing to commit himself to balancing the budget and maintaining a sound currency. Hoover first offered his account verbally to one of his closest political allies, Senator Simeon Fess of Ohio. At Fess’s request, Hoover put his remarks in writing in a letter he sent the Senator.
Franklin D. Roosevelt, “Address Accepting the Presidential Nomination at the Democratic National Convention in Chicago,” July 2, 1932. Available online from Gerhard Peters and John T. Woolley, The American Presidency Project. https://goo.gl/Rff9ht.
. . . There are two ways of viewing the Government’s duty in matters affecting economic and social life. The first sees to it that a favored few are helped and hopes that some of their prosperity will leak through, sift through, to labor, to the farmer, to the small business man. That theory belongs to the party of Toryism, and I had hoped that most of the Tories left this country in 1776.
But it is not and never will be the theory of the Democratic Party. This is no time for fear, for reaction or for timidity. . . .
. . . [T]he people of this country want a genuine choice this year, not a choice between two names for the same reactionary doctrine. Ours must be a party of liberal thought, of planned action, of enlightened international outlook, and of the greatest good to the greatest number of our citizens. . . .
I cannot take up all the problems today. I want to touch on a few that are vital. Let us look a little at the recent history and the simple economics, the kind of economics that you and I and the average man and woman talk.
In the years before 1929 we know that this country had completed a vast cycle of building and inflation; for ten years we expanded on the theory of repairing the wastes of the War, but actually expanding far beyond that, and also beyond our natural and normal growth. Now it is worth remembering, and the cold figures of finance prove it, that during that time there was little or no drop in the prices that the consumer had to pay, although those same figures proved that the cost of production fell very greatly; corporate profit resulting from this period was enormous; at the same time little of that profit was devoted to the reduction of prices. The consumer was forgotten. Very little of it went into increased wages; the worker was forgotten, and by no means an adequate proportion was even paid out in dividends – the stockholder was forgotten.
And, incidentally, very little of it was taken by taxation to the beneficent Government of those years.
What was the result? Enormous corporate surpluses piled up – the most stupendous in history. Where, under the spell of delirious speculation, did those surpluses go? Let us talk economics that the figures prove and that we can understand. Why, they went chiefly in two directions: first, into new and unnecessary plants which now stand stark and idle; and second, into the call-money1 market of Wall Street, either directly by the corporations, or indirectly through the banks. Those are the facts. Why blink at them?
Then came the crash. You know the story. Surpluses invested in unnecessary plants became idle. Men lost their jobs; purchasing power dried up; banks became frightened and started calling loans. Those who had money were afraid to part with it. Credit contracted. Industry stopped. Commerce declined, and unemployment mounted. . . .
Our Republican leaders tell us economic laws – sacred, inviolable, unchangeable – cause panics which no one could prevent. But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings. Yes, when – not if – when we get the chance, the Federal Government will assume bold leadership in distress relief. For years Washington has alternated between putting its head in the sand and saying there is no large number of destitute people in our midst who need food and clothing, and then saying the States should take care of them, if there are. Instead of planning two and a half years ago to do what they are now trying to do, they kept putting it off from day to day, week to week, and month to month, until the conscience of America demanded action.
I say that while primary responsibility for relief rests with localities now, as ever, yet the Federal Government has always had and still has a continuing responsibility for the broader public welfare. It will soon fulfill that responsibility. . . .
One word more: Out of every crisis, every tribulation, every disaster, mankind rises with some share of greater knowledge, of higher decency, of purer purpose. Today we shall have come through a period of loose thinking, descending morals, an era of selfishness, among individual men and women and among nations. Blame not governments alone for this. Blame ourselves in equal share. Let us be frank in acknowledgment of the truth that many amongst us have made obeisance to Mammon, that the profits of speculation, the easy road without toil, have lured us from the old barricades. To return to higher standards we must abandon the false prophets and seek new leaders of our own choosing.
Never before in modern history have the essential differences between the two major American parties stood out in such striking contrast as they do today. Republican leaders not only have failed in material things, they have failed in national vision, because in disaster they have held out no hope, they have pointed out no path for the people below to climb back to places of security and of safety in our American life.
Throughout the nation, men and women, forgotten in the political philosophy of the Government of the last years look to us here for guidance and for more equitable opportunity to share in the distribution of national wealth.
On the farms, in the large metropolitan areas, in the smaller cities and in the villages, millions of our citizens cherish the hope that their old standards of living and of thought have not gone forever. Those millions cannot and shall not hope in vain.
I pledge you, I pledge myself, to a new deal for the American people. Let us all here assembled constitute ourselves prophets of a new order of competence and of courage. This is more than a political campaign; it is a call to arms. Give me your help, not to win votes alone, but to win in this crusade to restore America to its own people.
- 1. Unlike a loan given for a specified term, call money must be repaid when the lender requests it.