Sputnik was a small, simple, harmless device that would orbit earth but it spurred a lot of conversation and opinion around the world. Americans saw it as a symbolic victory for the soviets in scientific advances. The satellite had little use besides orbiting around the earth and sending out random radio signals. These signals could be heard through a radio broadcast which Americans could tune into. This only made Americans more eager to match or outdo the soviet union in this "space race". Americans were also fearful that sputnik could be a nuclear threat to the United States which they could have no control over.
Sputnik was a huge scientific advancement, the first man-made object to orbit the earth. While the US was known for their technological and scientific advances, the Soviets swooped this opportunity from them. The launch of Sputnik was during a time of tense exchanges between the Soviets and the US, each side trying to figure out the other's worth. Sputnik proved to Americans that the Soviet Union was capable of things that the US was not capable of. The US was in a state of self-doubt. The media added a lot to America's hysteria. They exaggerated the power of Sputnik for more attention.
Another reaction to Sputnik was the National Defense Education Act, which improved education regarding space travel, science, and technology. This was a reaction to the notion that the US was behind in sciences and technology due to Sputnik. President Dwight E Eisenhower first reacted to Sputnik by trying to undermine it's influence. He tried to calm the media and people down about Sputnik's threats. After more pressure from the American people however, Eisenhower addressed that the US needed to make more scientific advancements, otherwise seen as a way to match the Soviet's space influence.
The US finally responded well to the soviets by launching project Vanguard, which was a launch of a satellite in space. It was still overshadowed by Sputnik, but it made more scientific impacts. It also lasted much longer than Sputnik, because Sputnik decayed in space after a few weeks, which Vanguard outlasted by still being in orbit today.
Sources:
http://www.pbs.org/wgbh/nova/space/sputnik-impact-on-america.html
https://www.eisenhower.archives.gov/research/online_documents/sputnik.html
Great post on the reaction and success of Sputnik! I think it is very important to highlight the importance of Sputnik in that that is was a catalyst for the missile arms race. Since everything was a competition between the two countries like you mentioned, Sputnik can be seen as the object that led to new space discoveries as well as new weapon discoveries.
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