In October 1929, only months after Hoover took office, the stock market crashed, the average value of 50 leading stocks falling by almost half in two months. Despite occasional rallies, the slide persisted until 1932, when stock averages were barely a fourth of what they had been in 1929. Industrial production soon followed the stock market, giving rise to the worst unemployment the country had ever seen. By 1933 at least a quarter of the work force was unemployed. Adjusted for deflation, salaries had fallen by 40 percent and industrial wages by 60 percent.

The causes of the Great Depression were many and various. Agriculture had collapsed in 1919 and was a continuing source of weakness. Because of poor regulatory policies, many banks were overextended. Wages had not kept up with profits, and by the late 1920s consumers were reaching the limits of their ability to borrow and spend. Production had already begun to decline and unemployment to rise before the crash. The crash, which was inevitable since stock prices were much in excess of real value, greatly accelerated every bad tendency, destroying the confidence of investors and consumers alike.

Hoover met the crisis energetically, in contrast to earlier administrations, which had done little to cope with panics except reduce government spending. He extracted promises from manufacturers to maintain production. He signed legislation providing generous additional sums for public works. He also signed the infamous Smoot–Hawley Tariff Act of 1930, which raised duties to an average level of 50 percent. These steps failed to ease the depression, however, while the tariff helped to export it. International trade had never recovered from World War I. Europe still depended on American sales and investments for income and on American loans to maintain the complicated structure of debt payments and reparations erected in the 1920s. After the crash Americans stopped investing in Europe, and the tariff deprived foreigners of their American markets. Foreign nations struck back with tariffs of their own, and all suffered from the resulting anarchy.

In the 1930 elections the Democratic Party won control of the House of Representatives and, in combination with liberal Republicans, the Senate as well. Soon afterward a slight rise in production and employment made it seem that the worst of the depression was over. Then, in the spring of 1931, another crisis erupted. The weakening western European economy brought down a major bank in Vienna, and Germany defaulted on its reparations payments. Hoover proposed a one-year moratorium on reparations and war-debt payments, but, even though the moratorium was adopted, it was too little too late. In the resulting financial panic most European governments went off the gold standard and devalued their currencies, thus destroying the exchange system, with devastating effects upon trade. Europeans withdrew gold from American banks, leading the banks to call in their loans to American businesses. A cascade of bankruptcies ensued, bank customers collapsing first and after them the banks.

Hoover tried hard to stabilize the economy. He persuaded Congress to establish a Reconstruction Finance Corporation to lend funds to banks, railroads, insurance companies, and other institutions. At the same time, in January 1932, new capital was arranged for federal land banks. The Glass–Steagall Act provided gold to meet foreign withdrawals and liberalized Federal Reserve credit. The Federal Home Loan Bank Act sought to prop up threatened building and loan associations. But these measures failed to promote recovery or to arrest the rising tide of unemployment. Hoover, whose administrative abilities had masked severe political shortcomings, made things worse by offering negative leadership to the nation. His public addresses were conspicuously lacking in candor. He vetoed measures for direct federal relief, despite the fact that local governments and private charities, the traditional sources for welfare, were clearly incapable of providing adequate aid for the ever-rising numbers of homeless and hungry. When unemployed veterans refused to leave Washington after their request for immediate payment of approved bonuses was denied, Hoover sent out the army, which dispersed the protesters at bayonet point and burned down their makeshift quarters.

Hoover’s failures and mistakes guaranteed that whoever the Democrats nominated in 1932 would become the next president. Their candidate was Gov. Franklin Delano Roosevelt of New York. He won the election by a large margin, and the Democrats won majorities in both branches of Congress.

The first New Deal

Roosevelt took office amid a terrifying bank crisis that had forced many states to suspend banking activities. He acted quickly to restore public confidence. On Inaugural Day, March 4, 1933, he declared that “the only thing we have to fear is fear itself.” The next day he halted trading in gold and declared a national “bank holiday.” On March 9 he submitted to Congress an Emergency Banking Bill authorizing government to strengthen, reorganize, and reopen solvent banks. The House passed the bill by acclamation, sight unseen, after only 38 minutes of debate. That night the Senate passed it unamended, 73 votes to 7. On March 12 Roosevelt announced that, on the following day, sound banks would begin to reopen. On March 13, deposits exceeded withdrawals in the first reopened banks. “Capitalism was saved in eight days,” Raymond Moley, a member of the president’s famous “brain trust,” later observed.

In fact, the legal basis for the bank holiday was doubtful. The term itself was a misnomer, intended to give a festive air to what was actually a desperate last resort. Most of the reopened banks were not audited to establish their solvency; instead the public was asked to trust the president. Nevertheless, the bank holiday exemplified brilliant leadership at work. It restored confidence where all had been lost and saved the financial system. Roosevelt followed it up with legislation that did actually put the banking structure on a solid footing. The Glass–Steagall Act of 1933 separated commercial from investment banking and created the Federal Deposit Insurance Corporation to guarantee small deposits. The Banking Act of 1935 strengthened the Federal Reserve System, the first major improvement since its birth in 1913.

With the country enthusiastically behind him, Roosevelt kept Congress in special session and piece by piece sent it recommendations that formed the basic recovery program of his first 100 days in office. From March 9 to June 16, 1933, Congress enacted all of Roosevelt’s proposals. Among the bills passed was one creating the Tennessee Valley Authority, which would build dams and power plants and in many other ways salvage a vast, impoverished region. The Securities Exchange Act gave the Federal Trade Commission broad new regulatory powers, which in 1934 were passed on to the newly created Securities and Exchange Commission. The Home Owners Loan Act established a corporation that refinanced one of every five mortgages on urban private residences. Other bills passed during the Hundred Days, as well as subsequent legislation, provided aid for the unemployed and the working poor and attacked the problems of agriculture and business.

Agricultural recovery

Hoover’s Federal Farm Board had tried to end the long-standing agricultural depression by raising prices without limiting production. Roosevelt’s Agricultural Adjustment Act (AAA) of 1933 was designed to correct the imbalance. Farmers who agreed to limit production would receive “parity” payments to balance prices between farm and nonfarm products, based on prewar income levels. Farmers benefited also from numerous other measures, such as the Farm Credit Act of 1933, which refinanced a fifth of all farm mortgages in a period of 18 months, and the creation in 1935 of the Rural Electrification Administration (REA), which did more to bring farmers into the 20th century than any other single act. Thanks to the REA, nine out of 10 farms were electrified by 1950, compared to one out of 10 in 1935.

These additional measures were made all the more important by the limited success of the AAA. Production did fall as intended, aided by the severe drought of 1933–36, and prices rose in consequence; but many, perhaps a majority, of farmers did not prosper as a result. The AAA was of more value to big operators than to small family farmers, who often could not meet their expenses if they restricted their output and therefore could not qualify for parity payments. The farm corporation, however, was able to slash its labor costs by cutting acreage and could cut costs further by using government subsidies to purchase machinery. Thus, even before the Supreme Court invalidated the AAA in 1936, support for it had diminished.