1. Economic Depression(s)
ECO 473 – Money & Banking – Dr. D. Foster

2. The Great Depression … of 1921
ECO 473 – Money & Banking
Dr. D. Foster

3. The Great Depression of 1920-1921
Was it necessary?
Yes – the inevitable cost of wartime inflation:
Fed accommodates Treasury & buys bonds.
Consumer prices:  11% in 1916
 17% in 1917
 18.6% in 1918
on a pace to  14% in 1919
Yes – the cost of transitioning back to peace:
Federal budget: $2 billion in 1917
$18 billion in 1919
$5 billion in 1920
$3 billion in 1921

4. The Great Depression of 1920-1921
How did it unfold?
Fed policy (individual Reserve Banks):
Nov. 1919, NYF raises i (discount) to 4.75%
Jan. 1920, NYF raises i to 6%
June 1920, NYF raises i to 7%
May 1921, Fed banks lower i to 6.5%, 6%
It was a depression:
Real output fell an est. 9%
Unemployment rose to an est. 19%
Industrial production down 31%
Corporate profits down 92%
Prices down an est. 20%

5. The Great Depression of 1920-1921
What did government do?
Presidents ignored the depression
Wilson – stroke; League of Nations
Harding – not the government’s place
Congress  spending & balanced budget
The real recovery of 1922:
Industrial production rose +26%
Mfg. employment rose from 8.2 mill. to 9 mill
Increased income, profits, confidence

6. 2008
1981
1920

7. The 1920s: Aftermath of the Great Depression
What happened in the 1920s?
Increased auto ownership.
The country became increasingly electrified.
Increased income.
Stock market boom.

8. DJIA inflation-adjusted, 1915-1933
Macrotrends.net

9. The 1920s: Aftermath of the Great Depression
What happened in the 1920s?
Increased auto ownership.
The country became increasingly electrified.
Increased income.
Stock market boom.
Problem areas:
wheat, coal
What precipitated the Great Depression?
Failure to maintain the gold standard.
Collapse of sound monetary policy.

10. Why did the depression last until 1932?
Herbert Hoover
Commerce Secretary in the 1920s.
Rallied business leaders in 1922.
Believed solution was to maintain wages & prices.
How a Depression becomes “Great”
Smoot-Hawley tariffs kick off trade war (1930).
Congress increases taxes to cover deficits (1932).
Hoover’s policy erodes business profits and raises unemployment.
Banks fail en masse in
Why didn’t it end?

11. 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

12. 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:

13. 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!!

14. 1933 Economic Rebound Gold inflows; banks rebound. March to July
Non-durables Production
+35%
Durables
+83%
Unemployment
-5%
Gold inflows; banks rebound.

15. 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

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

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

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

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

20. 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.

21. 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.

22. 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 …

23. The Depression of
Ur: decreased to 12% by then, back to 20%
Production rising now falling by 67% (dur.)
Stock prices rising now down 50%
Downturn worse than & !!!
Why?
FDR continues attacks on business.
Fed raises reserve requirements.
Labor laws raise labor costs.

24. 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
From , Net Investment = -$3 bill.
Contractionary monetary policy.

25. 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.

26. Another Great Depression Story

27. 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.

28. The Great Depression of 1946
1945
1946
1947 4%

29. The Great Depression of 1946
What Happened from ?
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.

30. 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?

31. Economic Depression(s)
ECO 473 – Money & Banking – Dr. D. Foster