The Great Depression & New Deal ( ) Part 1: Basic Economics + Causes of GD

Transcription

1 The Great Depression & New Deal ( ) Part 1: Basic Economics + Causes of GD

2 Introduction The nation, like all capitalist nations, had suffered economic downturns many times, including longterm depressions (1837, 73, 93) But the 1930s Depression was different Many Americans gripped by fear for their survival Widespread bank and business failures and unemployment Affected both middle and working-class people FDR was elected four times throughout its duration, resulting in a dramatic expansion of the federal government

3 The Constitution & the Economy The Constitutional basis for government involvement in the economy comes from Article I of the U.S. Constitution Economic powers granted to Congress: Collect taxes Provide for the general welfare Borrow money Regulate interstate and foreign commerce Establish bankruptcy laws Coin money and regulate its value Protect writings/discoveries of authors/inventors Question: How would you characterize the economic powers of Congress granted in 1787? A lot? A little? Unclear?

4 Theme Economic History Early republic (1787 to 1830s) Age of Jackson (1830) Civil War ( ) Gilded Age ( ) Progressive Era & WWI ( ) The Roaring 20 s ( ) The New Deal ( ) Post-WWII (1946 and beyond)

5 Historical Period Early Republic (1787 to 1830s) Age of Jackson (1830s) Civil War ( ) Role of the U.S. Government in the Economy Constitution builds basis for government intervention Hamilton s fiscal plan: national bank; assumption of war debts to ensure good credit; protectionist economic policy (tariff) Generally speaking, subsequent presidents continue in that fashion, supporting the American system (tariff + bank + internal improvements) Gilded Age ( )

6 Historical Period Early Republic (1787 to 1830s) Role of the U.S. Government in the Economy Age of Jackson (1830s) Civil War ( ) General rejection of central planning: Killed the national bank; lowered tariffs slightly after the Nullification Crisis; refused funding for internal improvements Led to economic chaos (Panic of 1837) Gilded Age ( )

7 Historical Period Early Republic (1787 to 1830s) Role of the U.S. Government in the Economy Age of Jackson (1830s) Civil War ( ) Gilded Age ( ) Large expansion of federal power in the economy Homestead and Morrill Land Grant Acts of 1862; borrowed billions; instituted first income tax (temporarily); increased tariff

8 Historical Period Early Republic (1787 to 1830s) Role of the U.S. Government in the Economy Age of Jackson (1830s) Civil War ( ) Gilded Age ( ) Government intervened in support for big business Put down strikes and unions; subsidized railroads; tariffs to support American business

9 Historical Period Role of the U.S. Government in the Economy Progressive Era & WWI ( ) Roaring 20s (1920s- 33) Government as regulator of economy/capitalism A shift away from support for big business Exploited masses get some relief WWI significant increase in control over the economy The New Deal ( ) Post-WWII (1946 and beyond)

10 Historical Period Role of the U.S. Government in the Economy Progressive Era & WWI ( ) Roaring 20s (1920s- 33) The New Deal ( ) Post-WWII (1946 and beyond) U.S. was in great position economically after WWI Republican presidents partnered with business and pulled away from Progressive Era tendencies Economic conservatism and belief in trickle-down economics Turned a blind eye to problems that should have been apparent by the middle of the decade Historians agree that these policies contributed to the Great Depression

11 Historical Period Role of the U.S. Government in the Economy Progressive Era ( ) Roaring 20s (1920s- 33) The New Deal ( ) Post-WWII (1946 and beyond) Government as safety net and provider of jobs in hard times Government should actively fix recessions by way of taxing/spending policies and control of interest rates and the money supply

12 Historical Period Role of the U.S. Government in the Economy Progressive Era ( ) Roaring 20s (1920s- 33) The New Deal ( ) Post-WWII (1946 and beyond) Employment Act of 1946 passed, declaring that the federal government had a responsibility to stabilize the economy and maximize employment

13 Question: Historical Periods + the Economy Do you see more continuity or change in the chart? Do you notice any patterns?

14 The Business Cycle (1) The economy is never still; instead, it is fluid, moving towards what economists have classified as the four stages/phases of the business cycle Cycles are irregular in length and severity; very difficult to predict Use of economic indicators (GDP, inflation, unemployment) to help determine where the economy is at

15 The Business Cycle (2) Expansion is from trough to peak (highpoint) Economy in recovery; prosperity = increase in productivity (GDP), demand increasing healthy inflation (prices + wages going up slowly); unemployment goes down Eventually + inevitably (historically) it reaches a climax and begins contraction

16 Business Cycle (3) What explains the process of boom to bust + back to boom? Causes of booms: wartime mobilization; gov. stimulus; firms pick up production; advancements in technology or new industries Causes of busts: negative global shock; shortage of materials; rising interest rates that stifle spending (+ thus demand, production, + eventually employment); failing industries; insurmountable debt; Recession: contraction over 6 months Depression (rare): no clear definition, but plunging GDP, high unemployment; triggered by banking/financial crisis

17 Role of Government in the Economy (since FDR) Since 1940s, most governments of developed nations have seen the mitigation of the business cycle as part of their responsibility To stabilize the economy + fix/prevent recessions, the U.S. government uses: Fiscal policy: How the government uses taxes and spending to influence economic conditions (Congress and/or president) Monetary policy: Adjusting the amount of money in the economy to influence interest rates, borrowing, spending, and production (run by the Federal Reserve, created in the Progressive Era)

18 Fiscal/Monetary Policy: Options Available If economic times are rough (unemployment is increasing, production is going down, etc.), the conventional thinking is that: Fiscal policy: Congress should Decrease taxes so people have money to spend (demand increases production increases employment increases) Increase government spending (stimulate economy, create jobs) Monetary policy: the Fed should Increase money supply (by buying bonds from the U.S. government and other banks) to stimulate demand Decrease interest rates to encourage borrowing and spending

19 F/M Policy: Pre-Depression Usage Congress fiscal policy (spending/taxing): Tariffs: lowered during Progressive Era; increased during the 20s Taxes: income tax created by the 16 th Amendment in 1913; increased taxes during Progressive Era; lowered during the 20s Progressive Era spending was greatly reduced in the 20s Federal Reserve monetary policy: Warned banks to curb their loose-money approach; tried their best to track the economy at home and abroad; increased interest rates too late ( 28-29), hurting the economy

20 Causes of the Great Depression (1) Old industries declined New industries unexpectedly slowed down by mid-20s Agricultural crisis

21 Causes of the Great Depression (2) Insurmountable debts due to easy credit (from ) which then reduced demand unemployment Unequal distribution of income A reluctant Federal Reserve who acted too late

22 Role of the Fed & the Tariff The Fed: Increased interest rates in in an attempt to slow down the borrowing This was bad timing, as the economy had already started slowing down due to the problems on the previous slide Money supply severely contracted Smoot-Hawley Tariff of 1930: Dramatically increased tariffs Economists argued [correctly] that it would raise the cost of living, limit U.S. exports as countries retaliated, + damage foreign affairs

23 The Stock Market Explained

24 Role of the Stock Market Stock prices rose steadily throughout the 20s Risky transactions for chance of quick profit Many bought on margin, where only a small percentage of a stock price was paid the rest was borrowed Prices peaked in 29 Confidence wavered and investors sold stocks Stock bubble had finally burst (Oct. 29, Black Tuesday ) Hastened collapse of the economy but was not the sole reason for it