fdr and his times fdr’s economic program in the great depression
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FDR and His Times
FDR’s Economic Programin the Great Depression
Lecture by Robert M. CoenProfessor Emeritus of Economics
Northwestern University
Alumnae Continuing EducationOctober 18, 2011
Lecture Outline
1. The economy prior to FDR’s inauguration: 1920’s zoom, 1930’s doom
2.Hoover’s response to the depression
3.Influences on FDR’s approach to economic issues
4.FDR’s search for cures
5.The economy’s performance from 1933-1940
6. An assessment of FDR’s economic leadership
600
650
700
750
800
850
900
950
1,000
1,050
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
659.3
706.5
805.5
826.8
845.4
896.2 901.2
917.9
976.9
892.6
835.1
725.6
Real GDP, 1921-1932B
illio
ns
of 2
00
5 d
olla
rs
Year
0
5
10
15
20
25
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
11.3
8.6
4.35.3
4.7
2.93.9
4.7
2.9
8.9
15.7
22.9
Unemployment Rate, 1921-1932P
erc
en
t
72
76
80
84
88
92
96
100
104
108
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
104.4
97.0
99.9 99.9
101.6102.3
100.499.6 100.0
96.3
86.4
76.3
Price Level, 1921-1932(Implicit GDP Deflator)
Ind
ex,
19
29
= 1
00
Clouds Forming in the 1920’s
Speculative bubble emerges on Wall Street
Housing construction slows
Declining farm incomes
Growing inequality
Troubles abroad War debts and reparations Badly functioning international gold standard
20
40
60
80
100
29.1
35.2 36.038.1
47.0
52.6
61.9
78.5
100.0
78.5
49.4
25.5
S&P Stock Price Index, 1921-1932In
de
x, 1
92
9=
10
0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
5336.0
9372.0
11185.0
13016.1
14101.0 13973.0
13166.0
12142.0
8527.9
4609.14124.1
1798.0
Value of New Housing Units Put in Place, 1921-1932M
illio
ns
of d
olla
rs
-200
0
200
400
600
800
1,000
1905 1910 1915 1920 1925 1930 1935
Net Immigration, 1901-1939T
ho
usa
nd
s
Year
50
60
70
80
90
100
110
120
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
110.0
99.0
80.0
87.089.0 89.0
95.0
91.0
88.0
91.092.0
83.0
67.0
58.0
Farm Price Parity Ratio, 1919-1932(Ratio of prices received to prices paid)
Ind
ex,
19
67
= 1
00
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
9078.0
7795.0
3370.0
4343.0
5068.04855.0
6734.0
5937.0
5699.0
5981.06152.0
4259.0
3344.0
2032.0
Net Farm Income, 1919-1932M
illio
ns
of d
olla
rs
Share of Income Received by Top 1%, 1913-2008
War Debts – Much Owed to US
Allied powers total $12 billion Britain 5 billion France 4 billion
Owed to Britain 17 countries $11 billion by 17 countries France 3 billion Russia 2.5 billion
German reparations
Treaty of Versailles sets initially at $5 billion in payments by May 19211921 London conference raised total to $12.5 billion1924 Dawes Plan reduces to $8-10 billion Initially payments of $250 million/yr for 10 years, rising to $600 million
In 1930’s, reparations cancelled, France and Britain default on war debt
2,000
3,000
4,000
5,000
6,000
7,000
1900 1905 1910 1915 1920 1925 1930
US GR FR UK
Real GDP per Person, 1900-19321
99
0 d
olla
rs
Book recommendation on demise of gold standard and economic dislocations after World War I
Lords of Finance: The Bankers Who Broke the WorldBy Liaquat Ahamed
The Great Depression
1929 1932 %change
Real GDP 977.0 725.8 -25.7 (2005 prices)
Employment (private) 34.1 25.1 -26.4
Unemployment rate 2.9 22.9 +20.9 Price level 100.0 76.7 -23.3 (1929=100)
Consumer spending 736.6 614.7 -16.5
Investment spending 101.7 12.9 -87.3
Exports 38.0 20.4 -46.3
Economic Orthodoxy circa 1929
Basic Tenets
Inflation caused by increase in money supplyGovernments tempted to print too much moneyFluctuations in production unavoidable, desirablePersistent unemployment due to excessive wagesHad to walk without Keynes
Major Policy Implications
Back money with gold to maintain confidence in currencyRequire government to balance budget Eliminate temptation to print moneyAllow business cycles to run their course Don’t interfere with creative destruction of free marketKeep wages and prices flexible; promote competition
Hoover's response to the depression
Depression originated in international economic problems
Proposed World Economic Conference to resolve
Confidence needed to be restored byReturn to gold standard at pre-war paritiesKeep government budgets balanced
Let cleansing, healing forces of market do their thing
Actions were taken
Smoot-Hawley Tariff, June 1930
Facing budget deficits, raised income tax rates in 1932; but debt grows
Federal Home Loan Act, July 1932
Reconstruction Finance Corporation, July 1932 Created by Emergency Relief and Construction Act Modeled on War Finance Corporation of WWI Low-interest loans to banks, railroads, mortgage lenders, others Loans for state-local local public works and relief Continued by FDR
1932 Income Tax Rate Increases
Taxable income Old rate New rate
$2,000 0.3% 2.0%
10,000 1.5 6.0
100,000 15.8 30.2
1,000,000 24.1 57.1
Personal exemption reduced from $1,500 to $1,000 ($3,500 to $2,500 for married couple)
12
16
20
24
28
32
36
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
32.8
31.6
26.2
24.3
22.5
20.219.3
18.1
16.3
17.7
22.0
33.2
Federal Government Debt, 1921-1932Percent of GDP
Pe
rce
nt
Influences on FDR’s Economic Thinking
Legacy of WWI economic planning and debt finance
Harvard education
Summers in Warm Springs
Brain Trust
The Brains Trust
Raymond Moley A. A. Berle, Jr. Rexford G. Tugwell
FDR's Search for Cures
Stabilize banking
Emergency employment
Reflation
Reduce home mortgage foreclosures
Deficit spending?
Economist George WarrenTime Magazine cover, November 27, 1933Story title: The Cabinet: Teachers & Pupils
Banks Suspending Payments to Depositors
Suspending payments TotalYear Number Deposits ($mil) banks
1921-25 582 $159 29,567average
1926 976 260 27,7421927 669 199 26,6501928 499 143 25,7981929 659 231 24,9701930 1,352 869 23,6791931 2,294 1,691 21,6541932 1,456 725 18,7341933 4,004 3,601 14,207
1934-40 448 477 14,534average
600
700
800
900
1,000
1,100
1,200
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
976.9
892.6
835.1
725.6716.4
794.6
864.9
978.3
1028.3
992.4
1073.2
1133.3
Real GDP, 1929-1940B
illio
ns
of 2
00
5 d
olla
rs
Year
0
5
10
15
20
25
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
2.9
8.9
15.7
22.9
20.9
16.2
14.4
10.09.2
12.511.3
9.5
Unemployment Rate, 1929-1940P
erc
en
t
Federal “Emergency Workers”(Mainly WPA and CCC Workers)
Number Effect on unemployment rateYear 1,000s Without With Diff
1931 299 16.3 15.7 -0.61932 592 24.1 22.9 -1.21933 2,195 25.2 20.9 -4.31934 2,974 22.0 16.2 -5.81935 3,087 20.3 14.4 -5.9
1936 3,744 17.0 10.0 -7.01937 2,763 14.3 9.2 -5.11938 3,591 19.1 12.5 -6.61939 3,255 17.2 11.3 -5.91940 2,830 14.6 9.5 -5.1
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
SurplusReceiptsExpenditures
Federal Receipts, Expenditures, and Budget Surplus, 1929-1940M
illio
ns
of d
olla
rs
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
29 30 31 32 33 34 35 36 37 38 39 40
Income GoodsCorporate Social ins
Federal Receipts, 1929-1940M
illio
ns
of d
olla
rs
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
29 30 31 32 33 34 35 36 37 38 39 40
Goods/services TransfersState aid InvestmentInterest Subsidies
Federal Expenditures, 1929-1940M
illio
ns
of d
olla
rs
12
16
20
24
28
32
36
40
44
48
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
16.317.7
22.0
33.2
40.041.0
39.240.3 39.6
43.2 43.942.4
Federal Government Debt, 1929-1940Percent of GDP
Pe
rce
nt
70
75
80
85
90
95
100
105
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
100.0
96.3
86.4
76.3
74.2
78.3
79.980.8
84.3
81.881.0
84.4
Price Level, 1929-1940(Implicit GDP Deflator)
Ind
ex,
19
29
= 1
00
20
40
60
80
100100.0
78.5
49.4
25.5
33.2
38.141.3
58.3 58.3
43.747.0
43.7
S&P Stock Price Index, 1929-1940
Ind
ex,
19
29
=1
00
0
2,000
4,000
6,000
8,000
10,000
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
8528.0
4609.0
4123.9
1798.0
1128.01350.0
2558.0
4128.0
4539.04767.0
6549.0
7236.0
Value of New Housing Units Put in Place, 1929-1940M
illio
ns
of d
olla
rs
50
60
70
80
90
100
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
92.0
83.0
67.0
58.0
64.0
75.0
88.0
92.093.0
78.077.0
81.0
Farm Price Parity Ratio, 1929-1940(Ratio of prices paid to prices reveived)
Ind
ex,
19
67
=1
00
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
6152.0
4259.0
3344.0
2032.0
2555.0
2923.0
5278.0
4308.0
6005.0
4361.0 4414.0 4482.0
Net Farm Income, 1929-1940M
illio
ns
of d
olla
rs
Effect of Fiscal Policy on Full-Employment DemandHypothetical Example
Full Actual employment
Unemployment rate 8% 4%
GDP 800 1,000
Income tax receipts 8 10
Military spending 10 10
Budget surplus -2 0
Effect on FE demand +3.6 +2 = Military spending - 0.8*tax receipts
Effect of Fiscal Policy on Full-Employment Demand(% of Full-Employment GDP)Estimates of E. Cary Brown
Year Federal State-local Total
1929 -0.4 1.8 1.4 1930 0.0 2.0 1.9 1931 1.7 1.8 3.6 1932 1.0 0.9 1.8
1933 0.5 0.1 0.5 1934 2.0 -0.4 1.5 1935 1.9 -0.3 1.6 1936 2.5 0.2 2.6 1937 0.1 0.1 0.2 1938 1.2 0.0 1.2 1939 1.4 0.5 2.0
-2,000
0
2,000
4,000
6,000
8,000
10,000
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
SurplusReceiptsExpenditures
State-local Receipts, Expenditures, and Budget Surplus, 1929-1940M
illio
ns
of d
olla
rs
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