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

2. New Deal 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!!

3. 1933 Economic Rebound Gold inflows; banks rebound. March to July Non-durables Production +35% Durables+83% Unemployment-5%

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

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

6. 1933 Economic Slide AAA & NRA kick in. July to November Non-durables Production -19% Durables-32% Unemploymentno change

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

8. 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.

9. The Agricultural Adjustment Administration (1933) What the AAA did: –Kill 6 million piglet 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.

10. 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: 1942 – new court – rules in Wickard v. Filburn: It is a statutory plan to regulate and control agricultural production, a matter beyond the powers delegated to the federal government. Home-grown wheat in this sense competes with wheat in commerce.

11. 2 nd New Deal FDR & The 2 nd 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 …

12. The Depression of 1937-1938 U r : 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.

13. Anemic Recovery: 1938-1940 By 1940, back to where we were in 1937. U r : 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.

14. Effects of WWII on the Economy U r : decreased to <2% by 1943. Gov’t. spending rises by almost 900%. Rise in Consumption spending. Economic recovery as prescribed by Keynes. Were we better off? Unemployed  military. Rationing and price controls. Increased taxes. Increased money supply.

15. Another Great Depression Story

16. The Great Depression of 1946 Forecast: A return to Great Depression levels of unemployment. Contraction from 1945 (II) to 1946 (I)  Federal spending 67%  Federal spending 67% 1945 deficit ($3.3 tr.) to 1947 surplus ($760 b.)  ”Defense employment” by 11 million.  ”Defense employment” by 11 million. Armed forces/Federal jobs/Defense  RGDP about 15%  RGDP about 15%

17. 1945 1946 1947 4% The Great Depression of 1946

18. Despite fears, increased reliance on markets and decreased reliance on government proved effective. What Happened from 1945-1947? 5.6 mill. women exited labor force.5.6 mill. women exited labor force. 4 mill. non-mfg. jobs created.4 mill. non-mfg. jobs created. Real wages  7%.Real wages  7%. Investment & Exports growing.Investment & Exports growing.  Federal deficits keep interest rates low.  Federal deficits keep interest rates low. The Great Depression of 1946

19. 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. --S&L getting 25% from feds. Growth in the Regulatory State. --What isn’t “interstate commerce?” --Cap & Trade next? Rise of the Welfare State. --Can SS continue?

20. An end to the gold standard. --Increased monetary destabilization. --Culminated with inflationary 1970s. Increased Federalism. --Size of federal gov’t. still growing. --S&L getting 25% from feds. Growth in the Regulatory State. --What isn’t “interstate commerce?” --Cap & Trade next? Rise of the Welfare State. --Can SS continue? Consequences of the Great Depression

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