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TRANSCRIPT
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