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

2. 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:

3. 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!!

4. 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

5. FDR & Economic Policy
Banking
Relief
Jobs
TVA
AAA
NRA

6. 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.

7. The Agricultural Adjustment Administration (1933)
Protect farm incomes.
Keep prices high … by keeping output low.
Establish “parity prices” from
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.

8. 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 …

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

10. 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.

11. 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 ?
5.6 mill. women exited labor force.
4 mill. non-mfg. jobs created.
Investment & Exports growing.

12. 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?

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