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The Great Depression & New Deal

(1929-1941)

Part 1: Basic Economics + Causes of GD

Introduction The nation, like all capitalist nations, had suffered

economic downturns many times, including long-

term 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

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?

Theme—Economic History Early republic (1787 to

1830s)

Age of Jackson (1830)

Civil War (1861-’65)

Gilded Age (1865-1900)

Progressive Era & WWI (1900-1920)

The “Roaring 20’s” (1920-1929)

The New Deal (1933-1941)

Post-WWII (1946 and beyond)

Historical

Period

Role of the U.S. Government in the Economy

Early Republic

(1787 to 1830s)

• 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)

Age of Jackson

(1830s)

Civil War

(1861-’65)

Gilded Age

(1865-1900)

Historical

Period

Role of the U.S. Government in the Economy

Early Republic

(1787 to 1830s)

Age of Jackson

(1830s)

• 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)

Civil War

(1861-’65)

Gilded Age

(1865-1900)

Historical

Period

Role of the U.S. Government in the Economy

Early Republic

(1787 to 1830s)

Age of Jackson

(1830s)

Civil War

(1861-’65)

• 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

Gilded Age

(1865-1900)

Historical

Period

Role of the U.S. Government in the Economy

Early Republic

(1787 to 1830s)

Age of Jackson

(1830s)

Civil War

(1861-’65)

Gilded Age

(1865-1900)

• Government intervened in support for big

business

• Put down strikes and unions; subsidized railroads;

tariffs to support American business

Historical Period Role of the U.S. Government in the Economy

Progressive Era

& WWI

(1900-’20)

• 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

“Roaring 20s”

(1920s-’33)

The New Deal

(1933-’41)

Post-WWII

(1946 and beyond)

Historical Period Role of the U.S. Government in the Economy

Progressive Era

& WWI

(1900-’20)

“Roaring 20s”

(1920s-’33)

• 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

The New Deal

(1933-’41)

Post-WWII

(1946 and beyond)

Historical Period Role of the U.S. Government in the Economy

Progressive Era

(1900-’20)

“Roaring 20s”

(1920s-’33)

The New Deal

(1933-’41)

• 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

Post-WWII

(1946 and beyond)

Historical Period Role of the U.S. Government in the Economy

Progressive Era

(1900-’20)

“Roaring 20s”

(1920s-’33)

The New Deal

(1933-’41)

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

Question: Historical Periods + the Economy

Do you see more continuity or change in the chart? Do you

notice any patterns?

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”

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

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

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)

Role of Government in the Economy (since FDR)

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

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 16th

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

Causes of the Great Depression (1)

Old industries declined

New industries unexpectedly slowed down by mid-20s

Agricultural crisis

Causes of the Great Depression (2)

Insurmountable debts due to

easy credit (from 1920-’28)

which then reduced demand

unemployment

Unequal distribution of

income

A reluctant Federal Reserve

who acted too late

Role of the Fed & the Tariff The Fed:

Increased interest rates in ’28-’29 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

The Stock Market Explained

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