Rethinking the Great Depression Effects of the New Deal The Depression of 1937-1938 An Anemic Recovery: 1938-1940 WWII & Great Depression of 1946 ECO 473 – Money & Banking – Dr. D. Foster

Myth vs. Reality of the Great Depression The myths: Capitalism failed. Markets failed. Government intervention was necessary. The New Deal saved capitalism. Growth in the 1920s was illusory. Herbert Hoover was a do-nothing President. The reality:

FDR & The New Deal Nation-wide bank “holiday”. Cooling off period to regain confidence. Re-opened banks could not redeem deposits in 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% Gold inflows; banks rebound.

FDR & Economic Policy No particular economics expertise. Change = f(academic advisors) The problem of “underconsumption/ overproduction” (?) Industrial planning Reform vs. Recovery Berle Tugwell Hopkins Moley

FDR & Economic Policy Banking Relief Jobs TVA AAA NRA

Non-durables Production 1933 Economic Slide July to November Non-durables Production -19% Durables -32% Unemployment no change AAA & NRA kick in.

Back to July 1933 … Industrial codes & price fixing. Date: Durables Production July 1935 Manufacturing Production August 1935 Unemployment October 1934 Industrial codes & price fixing.

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 piglets 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: It is a statutory plan to regulate and control agricultural production, a matter beyond the powers delegated to the federal government. 1942 – new court – rules in Wickard v. Filburn: 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 Why? Regime Uncertainty 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.

Did WWII save the Economy? Unemployment rate decreased to <2% by 1943. Gov’t. spending rose by almost 900%. Rise in Consumption spending. Economic recovery as prescribed by Keynes. Were we better off? The unemployed were now in the military. Goods were rationed and price controls were imposed. Increased taxes. Increased money supply.

A return to Great Depression levels of unemployment. The Great Depression of 1946 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% Forecast: A return to Great Depression levels of unemployment.

The Great Depression of 1946 1945 1946 1947 4%

The Great Depression of 1946 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. Despite fears, increased reliance on markets and decreased reliance on government proved effective.

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. --State/local getting 25% from feds. Growth in the Regulatory State. --What isn’t “interstate commerce?” --Cap & Trade next? Rise of the Welfare State. --Can Social Security continue?

Rethinking the Great Depression Effects of the New Deal The Depression of 1937-1938 An Anemic Recovery: 1938-1940 WWII & Great Depression of 1946 ECO 473 – Money & Banking – Dr. D. Foster