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

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!!

1933 Economic Rebound

Gold inflows; banks rebound.

March to July

Non-durables Production +35%

Durables +83%

Unemployment -5%

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

FDR & Economic Policy

• Banking

• Relief

• Jobs

• TVA

• AAA

• NRA

1933 Economic Slide

AAA & NRA kick in.

July to November

Non-durables Production -19%

Durables -32%

Unemployment no change

Back to July 1933 …

Industrial codes & price fixing.

Date:

Durables Production July 1935

Manufacturing Production August 1935

Unemployment October 1934

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.

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.

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.

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 …

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.

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.

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.

AnotherGreat

Depression Story

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%

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

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

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?

• 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

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