When it was time to elect a new president in 1932, Americans were ready for change and eager to embrace a new leader who could help them (Bryant, 1998). The election meant a lot to Americans and to the rest of the world, as national and global economies were in a state of chaos. America elected Franklin Delano Roosevelt and his soothing personality slowly inspired confidence and hope.
By the time Franklin D. Roosevelt became president in March of 1933, the banking system was in despair (PBS, 2008). Americans had seen $140 billion disappear when their banks failed. Businesses could not get credit for inventory. Checks could not be used for payments because no one trusted that the checks were good.
Roosevelt's New Deal began with the simple idea to try something new (Bryant, 1998). He was open to any and all suggestions. Some laws were passed that he did not like, but he signed them to prevent laws he disliked even more, or to avoid holding up other legislation. He felt that action was better than lack of action.
The New Deal had three goals: recovery from the depression, relief for its victims, and reform of the economic system. Much of the legislation reflected all three of these goals. For example, Roosevelt closed all the banks in the United States for three days and then re-opened them with strict limits on withdrawals.
Eventually, confidence returned to the system and banks were able to function again (PBS, 2008). To prevent this disaster from occurring in the future, the federal government created the Federal Deposit Insurance Corporation, which eliminated the rationale for bank "runs" - to get one's money before the bank "runs out." Backed by the FDIC, the bank could close, but then the government would reimburse depositors. Banks were also banned from investing depositors' money in stocks.
Many laws under the New Deal aimed to help the people recover (Bryant, 1998). One law set up a program that provided jobs to hundreds of thousands of young men. Another set up an agency that gave money to states to help the poor. There were also laws that were to aide economic recovery. For example, the National Recovery administration...
Since institutional investors typically hedge their risks by using asset liability management and derivatives instruments against market risk, it is estimated that institutional investors in a representative stock market such as the London Stock Exchange lost only 10% of the value of their assets in the 1987 crash. In the absence of such hedging the effect of the crash and the resultant liquidity crunch would have been far greater.
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