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!!

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

1933 Economic Rebound 1933 Economic Slide Back to July 1933 … Gold inflows; banks rebound. 1933 Economic Slide AAA & NRA kick in. Back to July 1933 … 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. What the AAA did: Kill 6 million piglets to maintain prices. Plow under 10 mill. acres of cotton (25%). Income transferred from non-farmers to farmers. AAA struck down in 1935: Supreme Court rules 6-3 in U.S. v. Butler While held to be a tax, it was not.

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 Anemic Recovery: 1938-1940 Ur: decreased to 12% by 1937 . . . then, back to 20% Production rising . . . now durables falling by 67% Stock prices rising . . . now down 50% Downturn worse than 1920-21 & 1929-30 !!! Anemic Recovery: 1938-1940 By 1940, back to where we were in 1937. Ur: decreased but still around 15%. Durable mfg. at 96% of July 1929 level. From 1930-1940, Net Investment = -$3 bill.

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.

The Great Depression of 1946 Contraction from 1945 (II) to 1946 (I) Federal spending 67% ”Defense employment” by 11 million. RGDP about 15% Forecast – A return to the Great Depression What Happened from 1945-1947? 5.6 mill. women exited labor force. 4 mill. non-mfg. jobs created. Investment & Exports growing.

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