IB History Reactions to 1929 Wall Street Crash Notes

The 1929 crash: Reactions turned panic into political change

The crash destroyed confidence

1. Share prices fell sharply in October 1929. Black Thursday on 24 October and Black Tuesday on 29 October became symbols of the collapse.
   1. Investors sold to meet margin calls. Forced sales pushed prices lower and increased losses.
   2. The crash did not cause every weakness. Agricultural distress, unequal income, fragile banks, and trade problems already existed.
   3. Its immediate effect was psychological and financial. Confidence collapsed, credit tightened, and households postponed spending.
   4. Business expectations changed quickly. Firms cut investment and production because future demand appeared uncertain.

Banks and firms protected themselves by contracting

1. Banks increased reserves and restricted lending. Defensive action protected liquidity but removed credit from businesses and consumers.
   1. Businesses reduced inventories and payrolls. Layoffs cut household income and reinforced falling demand.
   2. Consumers increased saving where possible. Fear of unemployment discouraged purchases of durable goods.
   3. Falling prices created deflation. Lower prices reduced company revenue and increased the real burden of existing debts.
   4. Individual caution produced collective contraction. Actions that seemed rational to each household or firm deepened the economy-wide crisis.

Hoover relied first on voluntary cooperation

1. President Herbert Hoover rejected the idea that government should remain completely inactive. He summoned business leaders and urged them to maintain wages and investment.
2. Hoover preferred voluntary agreements. He believed cooperation could restore confidence without permanent federal control.
   1. The approach depended on private capacity. As profits collapsed, firms abandoned wage pledges and cut employment.
   2. The Reconstruction Finance Corporation began in 1932. It lent federal money to banks, railways, and other institutions considered important to recovery.
   3. Critics called the policy trickle-down relief. They argued that support reached large institutions before unemployed families.

Public protest challenged limited relief

1. Unemployment overwhelmed local charities. Municipal governments and private organizations lacked resources for mass need.
   1. Breadlines and shantytowns became visible symbols. The label Hoovervilles connected suffering to presidential responsibility.
   2. The Bonus Army marched on Washington in 1932. Veterans demanded early payment of bonuses promised for future years.
   3. Federal troops removed the encampment. Images of veterans facing force damaged Hoover's political standing.
   4. Protest changed the political debate. Relief increasingly appeared to require direct federal responsibility.

The Federal Reserve failed to contain banking panic

1. The Federal Reserve permitted monetary contraction. It did not act consistently as lender of last resort during successive banking crises.
   1. Interest-rate choices reflected concern for gold reserves. Defending the dollar constrained expansionary action.
   2. Bank failures reduced the money supply. Depositors lost savings and surviving banks reduced loans.
   3. The final panic peaked in early 1933. States declared bank holidays before Roosevelt entered office.
   4. The crisis discredited existing financial governance. Emergency reform became politically possible only after institutional failure was obvious.

Roosevelt replaced reassurance with emergency action

1. Franklin D. Roosevelt took office on 4 March 1933. He framed fear and institutional paralysis as immediate political problems.
   1. A national bank holiday stopped withdrawals. The Emergency Banking Act allowed inspection and reopening of banks judged sound.
   2. Fireside chats explained policy directly. Roosevelt used radio to persuade depositors that reopened banks were safe.
   3. Deposit insurance changed expectations. The 1933 Banking Act created the FDIC and reduced the incentive for future runs.
   4. The New Deal expanded federal responsibility. Relief, recovery, and reform programmes marked a break from Hoover's reliance on voluntary coordination.

Canada reacted through cautious federalism

1. Prime Minister Mackenzie King initially minimized the crisis. His 1930 five-cent-piece speech suggested that unemployment relief was mainly a provincial responsibility.
2. Voters replaced the Liberals with R. B. Bennett's Conservatives. Bennett promised stronger action and tariff protection.
   1. Relief remained divided across levels of government. Municipal and provincial finances came under severe strain.
   2. Bennett's New Deal appeared in 1935. It proposed unemployment insurance, minimum wages, and regulation inspired partly by Roosevelt.
   3. The reforms came late and faced constitutional barriers. The Judicial Committee of the Privy Council invalidated key measures after Bennett lost office.

Latin American reactions strengthened state intervention

1. Export collapse weakened established elites. Governments dependent on customs revenue struggled to preserve older political arrangements.
2. Military and authoritarian interventions expanded in several states. The crisis contributed to coups and stronger executive power, although national paths differed.
   1. Brazil's 1930 Revolution brought Getulio Vargas to power. His government managed coffee, promoted industry, and centralized authority.
   2. Countries imposed exchange controls and tariffs. These measures conserved foreign currency and encouraged domestic production.
   3. Import substitution accelerated. The inability to purchase manufactured imports created incentives for local industry.

Specific measures and their political costs

1. Black Tuesday intensified the collapse. On 29 October, about 16 million shares changed hands as prices fell, making the crash a national symbol of economic breakdown.
2. Businesses cancelled expansion plans. Managers facing uncertain demand delayed construction and machinery purchases, which reduced orders for steel, cement, transport, and industrial equipment.
3. Consumers postponed durable purchases. Automobiles, radios, furniture, and appliances were often bought on instalment credit, so fear and unemployment quickly weakened mass-production industries.
4. The Federal Home Loan Bank Act addressed mortgages. It supported lending institutions in 1932, but arrived after many foreclosures and did not provide comprehensive direct aid to distressed owners.
5. The Emergency Relief and Construction Act widened federal involvement. It authorized public works and loans to states, showing that Hoover moved beyond strict voluntarism even though the response remained inadequate.
6. Hunger marches made suffering politically visible. Organized demonstrations demanded work and relief, challenging official claims that private charity could meet the emergency.
7. Farmers used direct action against foreclosure. Groups blocked auctions, intimidated prospective buyers, and sometimes returned property to indebted neighbours for symbolic prices.
8. The camp's removal damaged Hoover's legitimacy. Federal troops commanded by Douglas MacArthur cleared marchers with force, creating images that reinforced perceptions of an unsympathetic administration.
9. Banking panics worsened during the transition. Between Roosevelt's election and inauguration, withdrawals and state banking holidays increased while constitutional authority remained with Hoover.
10. Bennett initially emphasized tariffs and orthodox finance. The government sought imperial trade and balanced budgets before mounting political pressure encouraged a more interventionist programme near the 1935 election.

Reactions differed because institutions differed

1. US federal capacity expanded through crisis. Existing constitutional institutions survived while executive and administrative power grew.
   1. Canada's division of powers slowed national relief. Provincial responsibility and constitutional review limited Bennett's programme.
   2. Latin American states often combined economic reform with regime change. Intervention could strengthen labour policy and industry while reducing political pluralism.
   3. Timing shaped effectiveness. Early reassurance often failed because it did not address banking panic, unemployment, or collapsing demand.
   4. Political legitimacy depended on visible action. Governments that appeared passive faced elections, protest, coups, or institutional restructuring.

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