The Interwar American Economy: the Rise of Government
Gary D. Libecap
Pitt Professor, American History and Institutions, Cambridge University 2010-11
Professor, Bren School of Environmental Science and Management and Economics
Department, University of California, Santa Barbara
Lent Term 2011, January 27-February 17, 15:00
The objective of the course is to examine the forces underlying the growth of government,
particularly the central government, in the American economy. Historically, government
played a relatively small role in the economy, primarily providing public goods. Most
government involvement was through local and state governments, not the federal
government. Between 1918 and 1945 this changed dramatically with a). the rise of
government intervention in the economy; b). a shift from public good provision (money
supply, defense, disease control, transport, primary education, etc) to transfers (subsidies,
price supports, tariffs, other payments, etc); and c). a shift from state and local government to
federal government. There may be generalizations that could apply to developed and
developing economies more broadly.
We will explore this process in 4 lectures. The approach will be public choice--examining the
incentives and bureaucrats to supply government transfers, entry restrictions, and cartel
support to particular constituent groups, rather than broad public goods. These actions may or
may not be consistent with broad welfare maximization.
Background readings include:
PUBLIC CHOICE:
Sam Peltzman, 1976, “Toward a More General Theory of Regulation,” Journal of Law and
Economics 19 (2): 211-40, especially pp. 211-22.
Gary Becker, 1983, “A Theory of Competition among Pressure Groups for Political
Influence,” Quarterly Journal of Economics 98 (3): 371-400, especially pp. 371-88.
Ronald N. Johnson and Gary D. Libecap, 2001, “Information Distortion and Competitive
Remedies in Government Transfer Programs,” Economics of Governance 2: 101-34,
especially pp. 101-12.
BROAD BACKGROUND ON THE AMERICAN ECONOMY IN THE INTERWAR
PERIOD:
Jeremy Atack and Peter Passell, A New Economic View of American History from Colonial
Times to 1940, second edition: Chapter 20 “American Comes of Age: 1914-29;” Chapter 21,
“The Great Depression: Explaining the Contraction;” Chapter 22, “The Great Depression,
1933-39: The Recovery?;”Chapter 23, “The Extension of Government: From the Price of
Bread to the Price of Wheat.”
Michael D. Bordo, Claudia Goldin, and Eugene N. White, eds, The Defining Moment: The
Great Depression and the American Economy in the Twentieth Century, 1998, University of
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Chicago Press, Chapter 4, Hugh Rockoff, “By Way of Analogy: The Expansion of the
Federal Government in the 1930s,”128-154; Chapter 5, John Joseph Wallis and Wallace E.
Oates, “The Impact of the New Deal on American Federalism,”155-80.
AGRICULTURAL REGULATION INTERVENTION IN THE 1920s:
Elizabeth Hoffman and Gary D. Libecap, 1991, “Institutional Choice and the Development of
U.S. Agricultural Policies in the 1920s.” Journal of Economic History 51 (2): 397-411.
NEW DEAL AGRICULTURAL REGULATION:
Michael D. Bordo, Claudia Goldin, and Eugene N. White, eds, The Defining Moment: The
Great Depression and the American Economy in the Twentieth Century, 1998, University of
Chicago Press, Chapter 6, Gary D. Libecap, “The Great Depression and the Regulating State;
Federal Government Regulation of Agriculture, 1884-1970,”181-224.
Claudia Goldin and Gary D. Libecap, The Regulated Economy: A Historical Approach to
Political Economy, 1994, University of Chicago Press, Chapter 6, Elizabeth Hoffman and
Gary D. Libecap, “Political Bargaining and Cartelization in the New Deal: Orange Marketing
Orders” 189-221.
Barbara Alexander and Gary D. Libecap, 2000, “The Effect of Cost Heterogeneity in the
Success and Failure of the New Deal’s Agricultural and Industrial Programs,” Explorations in
Economic History 37: 370-400.
LECTURE 1, January 27, 2011 15:00 A Public Choice View of the Growth of Government
in the American Economy—readings, Peltzman, Becker, Johnson and Libecap. Background
readings in Atack and Passell, Chapters 20-23; Bordo, Goldin, and White, Chapters by
Rockoff; Wallis and Oates. Below are a series of questions to consider in reading in the
lecture.
A. Agriculture. Why is this sector, among the most efficient in the world, so heavily
regulated, especially through government-sponsored cartelization?
B. We will view this process of government growth using a public choice perspective—that
is, we will view government actions as initiated by self-interested politicians and bureaucrats.
Politicians will be modelled as vote maximizers and agency officials (US Department of
Agriculture, for example) as budget and mandate maximizers, with some oversight by
politicians, but considerable discretion.
C. What are the motives and costs facing politicians and bureaucrats in providing public
(non-rival) versus private goods?
D. What are the incentives to free ride in the provision of public goods as compared to private
goods?
E. What is the overall impact on the efficiency of the economy if politicians provide “too
many” private goods, such as cartelization, as compared to public goods? What constraints
exist on politicians? How will general taxpayers monitor? What problems face general
voters/constituents in monitoring government actions? What is the “focused benefits,
diverse costs” problem?
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F. We will view intervention primarily as cartel provision, although there clearly are other
types of intervention. What are transfers and why are they rarely in cash? What form will
they take? Why? What is the role of information distortion, such as the wrapping of private
transfers in public goods clothing?
G. What are the characteristics of successful interest groups? Size, wealth, homogeneity,
probability of voting, organization.
H. Why would naturally competitive industries be more politically attractive to regulate than
oligopolistic ones?
I. Why might regulation or transfers be implemented at a time of other exogenous shocks? A
crisis?
J. Why might producer protection be more likely during downturns in the economy while
consumer protection more likely during expansions?
K. Why will interest groups get less than they desire?
L. Why are competitive interest groups important for efficiency and limiting government?
M. Why might log rolling or trades among politicians lead to expansion of government
programs?
N. Remind yourself about cartel theory and the incentives to collude and to defect. How will
these factors affect the nature of government intervention?
O. With this background, we will turn to agricultural regulation in the U.S. in the interwar
period.
P. Until WWI, government played a small role in the American economy.
Why might that be? And when it did, it was through local and state governments, rather than
the central government. Again, why might that be?
Q. The end of WWI brought a number of changes. What were they and why did they affect
the role of government in agriculture?
R. What was the initial focus of government intervention and why?
LECTURE 2, February 3, 2011, Agricultural Regulation in the 1920s—readings Hoffman
and Libecap, 1991. Consider the following questions in the readings and in the lecture.
A. What were the implications of government programs for WWI for subsequent government
intervention in agriculture?
B. What happened in the macro economy in 1920-21 that triggered political support for
intervention?
C. Were price patterns the same across commodities? What happened to local, rural
economies?
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D. Why did only some commodity groups push for intervention?
E. Why was the government response initially via private cartelization via cooperatives,
rather than direct government intervention?
F. How would such actions raise prices and reduce output? Where would the excess go?
G. What legislation is enacted or attempted? What would it have accomplished in terms of
the cooperative movement?
G. Can you apply the economic theory of cartels to interest group politics in seeking
government intervention to raise prices and limit output?
H. Why were major commodities and not specialty crops the focus of attention?
I. Why were the 1905-14 price patterns chosen as the target prices? What would have to be
done to achieve them?
I. What other interventions were being taken elsewhere in the world that may have influenced
thinking on these matters for government intervention?
J. Why was a crisis needed to broadly expand the role of government in the economy?
LECTURE 3, February 10, 2011, Agricultural Regulation in the 1930s—readings
Libecap, Chapter 6. Consider the following questions for the readings and lecture.
A. The 1930s bring a fundamental change in government policies toward agriculture. What
were they and how were they manifested?
B. Can you categorize government legislation as to whether laws provided:
Public goods in agriculture;
Private goods via direct transfer payments;
Private goods via economic regulation through demand enhancement via government
purchases or supply control via output limits?
D. Which farm group characteristics were critical in securing intervention? What was the
identity of the largest and most influential group? Who were its members?
E. What was the initial emphasis of government cartelization and why did it fail
(economically or politically)?
F. How did the initial government cartel policy work? Quota design and enforcement.
G. What were the characteristics of major commodities as compared to specialty crops that
made them more conducive to political and economic cartelization?
H. What was the shift in cartel policy and why did it take place? How was it manifested?
I. Who clearly benefitted and who may have been harmed?
LECTURE 4, February 17, 15:00, Differential Political Support for Agricultural Policies
as Compared to Industrial Policies and the Lack of Success for Specialty Crop Programs—
readings Alexander and Libecap, Hoffman and Libecap. Consider the following questions for
the readings and lecture.
A. AAA.
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1. How was the AAA structured?
2. Why was it more successful than specialty crops as illustrated by Orange Marketing
Orders?
3. What were the key problems with OMO?
4. Who supported them and who did not? Why?
5. How does cartel theory help explain this pattern?
6. What happened when the AAA was thrown out by the U.S. Supreme Court and why?
B. NRA
1. How was the NRA or NIRA organized?
2. How did this differ from agriculture?
3. What were the problems with the individual industrial codes?
4. How does cartel theory help to understand this behavior?
5. What happened when the U.S. Supreme Court dismissed the NRA? Why? What were the
long term implications?
C. To Conclude:
1. Are there generalizations that might be drawn from the interwar American experience for
the role and intervention of government in other economies and at other times? If so, why and
if not, why not?
2. What are the long-term welfare implications of the pattern of government intervention into
the economy?
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