The high unemployment rates, deflation, bank closures, and business bankruptcies during the Great Depression caused the federal government, and namely President Roosevelt, to intervene in unprecedented ways in an effort to stabilize and lift the economy. Following the stock market crash of 1929, banks, from which loans had funded much of the equity purchases in the 1920s, began to fail from the impact of defaulted loans (Wheelock, 2013). The observed failure spurred a panic that saw consumers pull their money out of their banks, compounding the prevalence of bank closures. The stock crash and bank failures caused substantial financial losses for some and led to widespread decreased spending amidst the uncertainty (Wheelock, 2013). Bank failures also meant the inability to provide loans to new and existing businesses. The decrease in consumer spending and inability to secure funding caused firms to cut back expenses, leading to unemployment. Simultaneously, firms were forced to enact drastic price drops as a result product surpluses from lack of consumer demand. The unemployment and deflation fed back into the cycle of decreased consumer financial resources and spending.

While Roosevelt enacted many policies and programs under the New Deal, the most immediate action he took just two days after his Presidential inauguration was to pass legislature insuring bank deposits (Jacobs, 2021). Insuring bank deposits gave consumers the confidence needed to put their money back into banks, which in turn slowly enabled lending cycles to resume. While the consumer’s individual decision to put money back into a bank is a microeconomic effect, the resulting collective revival of the baking system had macroeconomic effects such as reducing deflation. Other notable programs from the New Deal include the creation of the Public Works Administration and the Tennessee Valley Authority which in the short and mid-term created jobs and reduced the unemployment rate (Jacobs, 2021), and in the long term had lasting impacts on the transportation and electrical infrastructure of the U.S. creating efficiencies that had macroeconomic effects.

References

Jacobs, M. (2021, January 1). Desperate Times, Desperate Measures: The Lessons of the New Deal. Foreign Affairs, 100(1), 60.

Wheelock, D. (2013). Role of bank failures & panics: The great depression. St. Louis Fed. https://www.stlouisfed.org/the-great-depression/curriculum/economic-episodes-in-american-history-part-6