THE GREAT DEPRESSION AND NEW DEAL STUDY GUIDE
Read over and complete the following study guide. In addition read over the notes from class and homework
Format of test
1. multiple choice questions
2. Short answer questions
3. Essay question
Causes of the Great Depression
 The Great Depression was a period of severe economic hardship lasting from 1929 to World War II. A combination of
factors caused the Great Depression. Three of the most important causes were:
1) Over speculation in stocks using borrowed money that could not be repaid when the stock market crashed
in 1929 and stock prices collapsed
o
Speculation is the act of buying something at a low price in the hope of reselling it later at a profit. One way people
make money off stocks is through speculation. They buy them at one price. Then when the stock’s price goes up, they
sell their stock at a profit.
o
Between 1920 and 1929 prices on the New York Stock Exchange, the nation’s largest stock market, steadily
increased. As a result, stock market speculators became very wealthy. Many of them realized if they borrowed
money, then they could buy even more stock. After these investors sold their stock, they could repay their loans
and still clear larger profits. This practice of buying stock on credit was called buying stock on margin.
o
Margin buying led to over speculation in the stock market. When the market dropped, investors who had bought stock
on credit found themselves in a difficult position. The terms of their loans allowed their creditors to demand enough
money to cover the stock’s original value. This forced investors to sell even more stock, which caused stock prices to
drop even further. This downward cycle continued until the New York Stock Exchange crashed.
2) The Federal Reserve’s failure to prevent widespread collapse of the nation’s banking system in the
late 1920s and early 1930s, leading to severe contraction in the nation’s supply of money in circulation
o
The Federal Reserve System functions as the central bank of the United States. The Federal Reserve Act created the
Federal Reserve Bank system in 1913. This law divided the United States into twelve Federal Reserve districts, each
of which possesses a Federal Reserve Bank. A Federal Reserve Bank is a banker’s bank. Only banks can have
accounts at a Federal Reserve Bank. If a bank needs to borrow money, it may do so from the Federal Reserve Bank.
However, a bank must pay interest on its loans from the Federal Reserve, just as individuals must pay interest if they
borrow money from a bank. The Federal Reserve Board, appointed by the President of the United States, oversees the
actions of the Federal Reserve Banks and sets the interest rate which banks must pay to borrow money from the Fed.
The Federal Reserve’s power to set interest rates enables it to control the nation’s money supply. If the Federal
Reserve Board believes the American economy is slowing down, it will cut interest rates and thereby encourage
borrowing. On the other hand, if the Federal Reserve Board believes the economy is overheating and thereby causing
inflation, then it will raise interest rates. (Inflation means prices increase, and the dollar buys less.)
o
When the stock market crashed in 1929, the Federal Reserve Board was unable to prevent it from triggering the
Great Depression. During the twenties, many banks had invested their savings deposits in the stock market. They had
also loaned money to speculators who were buying stock on credit. When the market crashed, these individuals could
not cover their loans. As a result, the banks lost the money, which they had loaned for stock speculation. Although the
Federal Reserve Board had recognized in the late twenties that speculation was out of control and had tried to adjust
interest rates accordingly, it could not protect individual banks from their unsound loan policies.
o
Once banks began to fail, Americans began to lose confidence in the nation’s entire banking system. Thousands
of Americans rushed to withdraw their savings from the banks, before they closed. This action placed even more
pressure on the nation’s banks. As a result, during the first three years of the Great Depression, five thousand banks
failed and nine million Americans lost their savings accounts. The Federal Reserve’s failure to prevent widespread
collapse of the nation’s banking system in the late 1920s and early 1930s led to a severe contraction (reduction) in the
nation’s supply of money in circulation.
3) High protective tariffs like the Hawley-Smoot Act (Tariff Act of 1930) that produced retaliatory tariffs in other
countries, which strangled world trade.
o
High protective tariffs also helped cause the Great Depression. A protective tariff is a tax on imports that is so high
that Americans cannot afford to buy foreign goods. After the 1929 stock market crash, Congress attempted to help
American business by passing the Tariff Act of 1930, which was popularly called the Hawley-Smoot Tariff. Since
the Hawley-Smoot Tariff was a protective tariff that set the highest tariff rates in American history, historians now
believe it actually had the opposite effect from what Congress intended. Instead of helping business by encouraging
Americans to buy American-made goods, the Hawley-Smoot Tariff encouraged foreign countries to retaliate by passing
high tariffs of their own. This meant foreigners could not afford to buy American goods. In short, the creation of tariff
barriers by all of the world’s major industrial powers strangled world trade. This decrease in world trade deepened the
worldwide depression.
Effects of the Great Depression
 The Great Depression had a four-pronged effect on the United States.
1) Unemployment skyrocketed and homelessness increased. By 1932 twelve million Americans were out of work, and the
unemployment rate stood at twenty-five percent of the American work force.
2) Bank closings led to a near collapse of the nation’s financial system.
3) Business bankruptcies, increased unemployment, and bank closings led to political unrest. Labor unions especially became
more militant, and some even questioned whether capitalism was the best economic system for the U.S.
4) The Great Depression worsened banks which foreclosed on thousands of farms. These foreclosures caused thousands of farm
families to migrate away from home. They traveled in search of jobs, which often did not exist.
Recovery from the Great Depression
 Most Americans blamed President Herbert Hoover, a Republican, for the terrible conditions of the Great Depression. As a
result, in the presidential election of 1932 the Democrat candidate Franklin Delano Roosevelt (FDR) overwhelmingly
defeated President Hoover’s bid for re-election.

At his inauguration, Roosevelt tried to rally the American people by telling them, “This is pre-eminently the time to speak
the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today.
This great nation will endure as it has endured, will revive and will prosper. So first of all let me assert by firm belief that
the only thing we have to fear is fear itself.”

President Roosevelt offered the “New Deal” program for the American people to end the Great Depression. This program
changed the role of the government to a more active participant in solving the nation’s problems. The power of the federal
government increased, and Americans came to expect the federal government to take responsibility for bringing
prosperity to the American economy. The New Deal followed a three-pronged strategy, often called the “three R’s.”
These three R’s were relief, recovery and reform.
Relief programs tried to ease the suffering of the unemployed. Relief measures, like the Works Progress Administration (WPA),
provided direct payments to people for immediate help. Many were public works programs which are construction projects that
benefit the whole society, like highways, bridges, schools, post offices, and parks. The federal government hired unemployed
Americans who could not find jobs.
Recovery programs aimed to bring about the recovery of business in all areas of the American economy. They were designed to
bring the nation out of depression over time. For example, the Agricultural Adjustment Administration (AAA) tried to help
farmers recover from the depression by limiting agricultural production and thereby raising livestock and crop prices.
Reform programs attempted to bring about change for the better in American society. Some reform programs tried to help prevent
future economic crises, by correcting unsound banking and investment practices. One program in this category was the Federal
Deposit Insurance Corporation (FDIC), which protects the money of depositors in insured banks. Other reform programs tried to
provide a degree of financial security for the most needy Americans. For example, the Social Security Act offered safeguards for
workers, including unemployment insurance and retirement benefits. Americans came to believe that American society should
use the federal government to provide care for those Americans, who could not take care of themselves.

Although the Great Depression did not end until World War II, the New Deal provided hope for millions of Americans
during one of the most difficult decades in American history. The New Deal permanently changed the role of the American
government in the economy. It also fostered (encouraged) changes in people’s attitudes toward government’s
responsibilities. Organized labor acquired new rights, like the right to form a union, the right to strike, and minimum wage.
Finally, the New Deal set in place federal legislation that reshaped modern American capitalism.
Identify the following
1. Stages of the Business Cycle
2. Three economic problems during the 1920’s
3. Black Tuesday
4. Problems that effected farmers during the 1920’s
5. Hoovervilles
6. Dust Bowl
7. Reconstruction Finance Corporation
8. Bonus Army
9. Hoover’s response to the Depression
10. FDIC
11. TVA
12. CCC
13. NRA
14. PWA
15. Views of the Opponents of the New Deal
16. WPA
17. Social Security Act
18. REA
19. Wagner Act
20. FDR’s Court packing plan
21. How the New Deal effected minority groups
22. How the New Deal effected the role of the government