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
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!!
1933 Economic Rebound
March to July
Non-durables
Production
+35%
Durables
+83%
Unemployment
-5%
Gold inflows; banks rebound.
FDR & Economic Policy
• No particular economics expertise.
• Change = f(academic advisors)
Berle
• The problem of
“underconsumption/
overproduction” (?)
Tugwell
• Industrial planning
• Reform vs. Recovery
Hopkins
Moley
FDR & Economic Policy
• Banking
• Relief
• Jobs
• TVA
• AAA
• NRA
1933 Economic Slide
July to November
Non-durables
Production
-19%
Durables
-32%
Unemployment
no change
AAA & NRA kick in.
Back to July 1933 …
Date:
Durables
Production
July 1935
Manufacturing
Production
August 1935
Unemployment
October 1934
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.
– 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.
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.
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.
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
•
•
•
•
Ur: 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.
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.
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.
Effects of WWII on the Economy
•
•
•
•
Ur: 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.
Another
Great
Depression
Story
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.
The Great Depression of 1946
Unemployment Rate 1945 - 1947
8.00%
7.00%
6.00%
4%
5.00%
4.00%
3.00%
2.00%
1947
IV
III
II
1947 I
1946
IV
III
II
1946 I
1945
IV
III
II
0.00%
1945 I
1.00%
The Great Depression of 1946
• What Happened from 1945-1947?
• 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.
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?
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?
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