Download Economic History of the US

Economic History of the US
Depression and the World Wars, 1914-46
Lecture #5
Peter Allen
Econ 120
New Deal, 1933-1941
Central economic planning and
stimulus
Two phases:
1. 1933-34
2. 1935-41
Fiscal stimulus
…too late for monetary stimulus
US did not emerge from the
Great Depression until
1942…
Response of Federal Government
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Worst crisis for the US since
the Civil War…
FDR, 1933-1945
“Only a crisis … produces
real change. When that
crisis occurs, the actions
that are taken depend on
the ideas that are lying
around.”
“Government must act…”
Keynes
New Deal
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Reconstruction Finance Corporation
Federal Emergency Relief Administration
Bank holiday
Abandonment of gold standard, 1933
Civilian Conservation Corps (CCC), 1933–1942
Homeowners Loan Corporation
Tennessee Valley Authority (TVA), 1933
Agricultural Adjustment Act, 1933 ruled unconstitutional.
National Industrial Recovery Act 1933 ruled unconstitutional
Public Works Administration (PWA), 1933
Federal Deposit Insurance Corporation (FDIC)
Glass–Steagall Act
Securities Act of 1933
Civil Works Administration , 1933–34
Indian Reorganization Act, 1934
Social Security Act 1935
Works Progress Administration (WPA), 1935
National Labor Relations Act (NLRA) / Wagner Act, 1935
Judicial Reorganization Bill, 1937
Federal Crop Insurance Corporation (FCIC), 1938
Surplus Commodities Program (1936)
Fair Labor Standards Act 1938
Rural Electrification Administration, (REA)
Resettlement Administration (RA)
Farm Security Administration (FSA)
 Vast expansion of
Government role in
the economy
 Controversial
 Deemed
unsuccessful in its
stated goals
Keynesian Revolution
 In 1933…
 Keynes
 Revolutionizes the
field of Economics…
 …to explain the causes
of the Great
Depression
 …and how
Governments should
respond
Crisis of Aggregate Demand
 J.M. Keynes said…
 …the cause of the GD was the collapse
of private investment spending (i.e. demand)
 …and consumption spending to a lesser extent (i.e.
also demand)
 Investment spending almost entirely discretionary
 In fact, private investment fell by 88.5%, from
$16.2 billion in 1929, to $1.9 billion in 1933
 …monetary policy would be ineffective due to
banking collapse (i.e. “liquidity trap”) and gold
standard
 (Keynes had argued that the UK should NOT go
back on the gold standard, but lost)
Gross Private Domestic Investment,
1929–40
Crisis of Aggregate Demand
 Government should replace Investment (I)
with an equivalent increase of Government
spending (G)
 “The General Theory of Employment,
Interest, and Money” (1936)
 Y = C + I + G + (X-M)
 In developing these arguments...
 …Keynes reinvented
macroeconomics
Did FDR take Keynes’ Advice?
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Federal Government Balance
(% of GDP)
1927
+1.1
1932
-4.8
1934
-5.2
1936
-4.5
1938
-0.2
1940
-2.7
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…initially, yes, but…
…FDR, staff uncomfortable with
deficits
Tried to balance in 1938
Large deficits relative to
tradition…
Fed gov. spending…
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from $1.4 bn, 3.1% of GDP in 1929
to $7.6 bn, 10% of GDP in 1936
…too small to replace the $14
billion (20% of GDP) fall in
private investment
Y = C + I + G + (X-M)
“fiscal policy seems to have
been unsuccessful in the „30s…
because it was not tried…”
…Until 1942, WWII