rethinking the great depression the new deal the depression of 1937-1938 anemic recovery of...
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Rethinking theGreat
DepressionThe New Deal
The Depression of 1937-1938
Anemic Recovery of 1938-1940
The Effects of WWII on the Economy
ECO 473 – Money & Banking
Dr. D. Foster
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FDR & The New Deal
• Nation-wide bank “holiday”.– Cooling off period to regain confidence.
– Re-opened banks could not redeem depositsin gold nor in gold certificates.
– Many big city banks open w/in a week.
– Most banks open w/in a month (90% and 70%).
– Established FDIC in June.
– Deposits flowed back into banks, R and ER.
– Bank crisis is over!!
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1933 Economic Rebound
Gold inflows; banks rebound.
March to July
Non-durables Production +35%
Durables +83%
Unemployment -5%
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FDR & Economic Policy
• No particular economics expertise.
• Change = f(academic advisors)
• The problem of “underconsumption/overproduction” (?)
• Industrial planning
• Reform vs. Recovery
Berle
Tugwell
Moley
Hopkins
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FDR & Economic Policy
• Banking
• Relief
• Jobs
• TVA
• AAA
• NRA
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1933 Economic Slide
AAA & NRA kick in.
July to November
Non-durables Production -19%
Durables -32%
Unemployment no change
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Back to July 1933 …
Industrial codes & price fixing.
Date:
Durables Production July 1935
Manufacturing Production August 1935
Unemployment October 1934
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The Agricultural Adjustment Administration (1933)
• Protect farm incomes.– Keep prices high … by keeping output low.
• Establish “parity prices” from 1910-1914.– Wheat, cotton, corn rice, tobacco, milk hogs.
– 1934/5: rye, grain, cattle, sugar, potatoes, and others.
• How?– Production controls/benefit payments/
non-recourse loans/marketing agreements
• Voluntary but steep taxes assessed.
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The Agricultural Adjustment Administration (1933)
• What the AAA did:– Kill 6 million piglet to maintain prices.– Plow under 10 mill. acres of cotton (25%).– Nebraska: kill 470,000 cattle & 440,000 hogs.– Texas: kill 2 million cattle.
• Results:– Income transferred from non-farmers to farmers.
– Wealthy & large farmers benefit.
– Over the 1930s, government must maintain surpluses.
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The Agricultural Adjustment Administration (1933)
• AAA struck down in 1935:– Supreme Court rules 6-3 in U.S. v. Butler– While held to be a tax, it was not:
1942 – new court – rules in Wickard v. Filburn:
It is a statutory plan to regulate and control agricultural production, a matter beyond the powers delegated to the federal government.
Home-grown wheat in this sense competes with wheat in
commerce.
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FDR & The 2nd New Deal
• NRA & AAA ruled unconstitutional.
– FDR embarks on a court-packing plan.
• New Federal Reserve structure.
• Social Security passed.
• Labor & the Wagner Act.
• Tax plans …
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The Depression
of 1937-1938• Ur: decreased to 12% by 1937 . . . then, back to
20%• Production rising . . . now falling by 67% (dur.)• Stock prices rising . . . now down 50%• Downturn worse than 1920-21 & 1929-30 !!!
Why?• FDR continues attacks on business.• Fed raises reserve requirements.• Labor laws raise labor costs.
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Anemic Recovery: 1938-1940
• By 1940, back to where we were in 1937.• Ur: decreased but still around 15%.• Durable mfg. at 96% of July 1929 level.• Housing construction reached 1929 levels . . . in
1951 !!Why? Regime Uncertainty• Net Investment = -$18 billion 1931-1935.• From 1930-1940, Net Investment = -$3
bill.• Contractionary monetary policy.
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Effects of WWII on the Economy
• Ur: decreased to <2% by 1943.• Gov’t. spending rises by almost 900%.• Rise in Consumption spending.• Economic recovery as prescribed by Keynes.
Were we better off?• Unemployed military.• Rationing and price
controls.• Increased taxes.• Increased money supply.
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AnotherGreat
Depression Story
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The Great Depression of 1946
Forecast:
A return to Great Depressionlevels of unemployment.
• Contraction from 1945 (II) to 1946 (I)
• Federal spending 67%• 1945 deficit ($3.3 tr.) to 1947 surplus
($760 b.)
• ”Defense employment” by 11 million.• Armed forces/Federal jobs/Defense
• RGDP about 15%
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Unemployment Rate 1945 - 1947
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%19
45 I II III
IV
1946
I II III
IV
1947
I II III
IV
1945 1946 1947
4%
The Great Depression of 1946
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Despite fears, increased reliance on markets and decreased
reliance on government proved effective.
• What Happened from 1945-1947?
• 5.6 mill. women exited labor force.
• 4 mill. non-mfg. jobs created.• Real wages 7%.
• Investment & Exports growing.• Federal deficits keep interest rates low.
The Great Depression of 1946
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Consequences of the
Great Depression• An end to the gold standard.
--Increased monetary destabilization.--Culminated with inflationary 1970s.
• Increased Federalism.--Size of federal gov’t. still growing.--S&L getting 25% from feds.
• Growth in the Regulatory State.--What isn’t “interstate commerce?”--Cap & Trade next?
• Rise of the Welfare State.--Can SS continue?
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• An end to the gold standard.--Increased monetary destabilization.--Culminated with inflationary 1970s.
• Increased Federalism.--Size of federal gov’t. still growing.--S&L getting 25% from feds.
• Growth in the Regulatory State.--What isn’t “interstate commerce?”--Cap & Trade next?
• Rise of the Welfare State.--Can SS continue?
Consequences of the
Great Depression
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Rethinking theGreat
DepressionThe New Deal
The Depression of 1937-1938
Anemic Recovery of 1938-1940
The Effects of WWII on the Economy
ECO 473 – Money & Banking
Dr. D. Foster