Download FDR's Economic Program in the Great Depression

FDR and His Times
FDR’s Economic Program
in the Great Depression
Lecture by Robert M. Coen
Professor Emeritus of Economics
Northwestern University
Alumnae Continuing Education
October 18, 2011
Lecture Outline
1. The economy prior to FDR’s inauguration: 1920’s zoom, 1930’s doom
2. Hoover’s response to the depression
3. Influences on FDR’s approach to economic issues
4. FDR’s search for cures
5. The economy’s performance from 1933-1940
6.
An assessment of FDR’s economic leadership
Real GDP, 1921-1932
1,050
1,000
976.9
917.9
901.2
896.2
900
892.6
845.4
850
835.1
826.8
805.5
800
750
725.6
706.5
700
659.3
650
Year
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
19
21
600
19
Billions of 2005 dollars
950
Unemployment Rate, 1921-1932
25
22.9
20
15
11.3
10
8.9
8.6
5.3
4.3
5
4.7
3.9
4.7
2.9
2.9
19
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
0
19
21
Percent
15.7
Price Level, 1921-1932
(Implicit GDP Deflator)
108
104
104.4
101.6
99.6
100.0
97.0
96.3
96
92
88
86.4
84
80
76.3
76
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
19
21
72
19
Index, 1929 = 100
100.4
99.9
99.9
100
102.3
Clouds Forming in the 1920’s
Speculative bubble emerges on Wall Street
Housing construction slows
Declining farm incomes
Growing inequality
Troubles abroad
War debts and reparations
Badly functioning international gold standard
S&P Stock Price Index, 1921-1932
100.0
100
78.5
78.5
61.9
60
52.6
49.4
47.0
40
35.2
36.0
38.1
29.1
25.5
19
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
20
19
21
Index, 1929=100
80
Value of New Housing Units Put in Place, 1921-1932
16,000
14101.0
14,000
13973.0
13166.0
13016.1
12142.0
11185.0
10,000
9372.0
8527.9
8,000
6,000
5336.0
4609.1
4124.1
4,000
2,000
1798.0
19
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
0
19
21
Millions of dollars
12,000
Net Immigration, 1901-1939
1,000
800
Thousands
600
400
200
0
-200
1905
1910
1915
1920
Year
1925
1930
1935
Farm Price Parity Ratio, 1919-1932
(Ratio of prices received to prices paid)
120
110.0
110
99.0
95.0
91.0
90
89.0
92.0
91.0
89.0
88.0
87.0
83.0
80.0
80
70
67.0
60
58.0
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
19
21
19
20
19
19
50
19
Index, 1967 = 100
100
Net Farm Income, 1919-1932
10,000
9,000
7795.0
7,000
6734.0
6152.0
6,000
5981.0
5937.0
5699.0
5068.0
5,000
4855.0
4343.0
4259.0
4,000
3370.0
3344.0
3,000
2,000
2032.0
1,000
19
19
19
20
19
21
19
22
19
23
19
24
19
25
19
26
19
27
19
28
19
29
19
30
19
31
19
32
Millions of dollars
8,000
9078.0
Share of Income Received by Top 1%, 1913-2008
War Debts – Much Owed to US
Allied powers total
Britain
France
Owed to Britain
17 countries
France
Russia
$12 billion
5 billion
4 billion
$11 billion by 17 countries
3 billion
2.5 billion
German reparations
Treaty of Versailles sets initially at $5 billion in payments by May 1921
1921 London conference raised total to $12.5 billion
1924 Dawes Plan reduces to $8-10 billion
Initially payments of $250 million/yr for 10 years, rising to $600 million
In 1930’s, reparations cancelled, France and Britain default on war debt
Real GDP per Person, 1900-1932
7,000
1990 dollars
6,000
5,000
4,000
3,000
2,000
1900
1905
1910
1915
US
GR
1920
FR
1925
UK
1930
Book recommendation on demise of gold standard and
economic dislocations after World War I
Lords of Finance: The Bankers Who Broke the World
By Liaquat Ahamed
The Great Depression
1929 1932
Real GDP
(2005 prices)
%change
977.0
725.8
-25.7
34.1
25.1
-26.4
2.9
22.9
+20.9
Price level
(1929=100)
100.0
76.7
-23.3
Consumer spending
736.6
614.7
-16.5
Investment spending
101.7
12.9
-87.3
38.0
20.4
-46.3
Employment (private)
Unemployment rate
Exports
Economic Orthodoxy circa 1929
Basic Tenets
Inflation caused by increase in money supply
Governments tempted to print too much money
Fluctuations in production unavoidable, desirable
Persistent unemployment due to excessive wages
Had to walk without Keynes
Major Policy Implications
Back money with gold to maintain confidence in currency
Require government to balance budget
Eliminate temptation to print money
Allow business cycles to run their course
Don’t interfere with creative destruction of free market
Keep wages and prices flexible; promote competition
Hoover's response to the depression
Depression originated in international economic problems
Proposed World Economic Conference to resolve
Confidence needed to be restored by
Return to gold standard at pre-war parities
Keep government budgets balanced
Let cleansing, healing forces of market do their thing
Actions were taken
Smoot-Hawley Tariff, June 1930
Facing budget deficits, raised income tax rates in 1932; but debt grows
Federal Home Loan Act, July 1932
Reconstruction Finance Corporation, July 1932
Created by Emergency Relief and Construction Act
Modeled on War Finance Corporation of WWI
Low-interest loans to banks, railroads, mortgage lenders, others
Loans for state-local local public works and relief
Continued by FDR
1932 Income Tax Rate Increases
Taxable income
Old rate
New rate
$2,000
0.3%
2.0%
10,000
1.5
6.0
100,000
15.8
30.2
1,000,000
24.1
57.1
Personal exemption reduced from $1,500 to $1,000 ($3,500 to $2,500
for married couple)
Federal Government Debt, 1921-1932
Percent of GDP
36
33.2
32.8
31.6
32
28
24.3
24
22.5
22.0
20.2
20
19.3
18.1
17.7
16.3
16
32
19
31
19
30
19
29
19
28
19
27
19
26
19
25
19
24
19
23
19
22
19
21
12
19
Percent
26.2
Influences on FDR’s Economic Thinking
Legacy of WWI economic planning and debt finance
Harvard education
Summers in Warm Springs
Brain Trust
The Brains Trust
Raymond Moley
A. A. Berle, Jr.
Rexford G. Tugwell
FDR's Search for Cures
Stabilize banking
Emergency employment
Reflation
Reduce home mortgage foreclosures
Deficit spending?
Economist George Warren
Time Magazine cover, November 27, 1933
Story title: The Cabinet: Teachers & Pupils
Banks Suspending Payments to Depositors
Year
1921-25
average
1926
1927
1928
1929
1930
1931
1932
1933
1934-40
average
Suspending payments
Number
Deposits ($mil)
Total
banks
582
$159
29,567
976
669
499
659
1,352
2,294
1,456
4,004
260
199
143
231
869
1,691
725
3,601
27,742
26,650
25,798
24,970
23,679
21,654
18,734
14,207
448
477
14,534
Real GDP, 1929-1940
1,200
1133.3
1073.2
1028.3
1,000
992.4
978.3
976.9
900
892.6
864.9
835.1
794.6
800
725.6
716.4
700
Year
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
600
19
Billions of 2005 dollars
1,100
Unemployment Rate, 1929-1940
25
22.9
20.9
20
16.2
14.4
15
12.5
11.3
10.0
10
8.9
9.5
9.2
5
2.9
19
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
0
19
29
Percent
15.7
Federal “Emergency Workers”
(Mainly WPA and CCC Workers)
Year
Number
1,000s
Effect on unemployment rate
Without
With
Diff
1931
1932
1933
1934
1935
299
592
2,195
2,974
3,087
16.3
24.1
25.2
22.0
20.3
15.7
22.9
20.9
16.2
14.4
-0.6
-1.2
-4.3
-5.8
-5.9
1936
1937
1938
1939
1940
3,744
2,763
3,591
3,255
2,830
17.0
14.3
19.1
17.2
14.6
10.0
9.2
12.5
11.3
9.5
-7.0
-5.1
-6.6
-5.9
-5.1
Federal Receipts, Expenditures, and Budget Surplus, 1929-1940
10,000
8,000
4,000
2,000
0
-2,000
Surplus
Receipts
Expenditures
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
-4,000
19
Millions of dollars
6,000
Federal Receipts, 1929-1940
9,000
8,000
Millions of dollars
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
29
30
31
32
33
34
Income
Corporate
35
36
37
Goods
Social ins
38
39
40
Federal Expenditures, 1929-1940
10,000
9,000
Millions of dollars
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
29
30
31
32
33
34
Goods/services
State aid
Interest
35
36
37
Transfers
Investment
Subsidies
38
39
40
Federal Government Debt, 1929-1940
Percent of GDP
48
43.2
44
40.0
40
41.0
39.2
40.3
43.9
42.4
39.6
36
32
28
24
22.0
20
17.7
16.3
16
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
12
19
Percent
33.2
Price Level, 1929-1940
(Implicit GDP Deflator)
105
100
100.0
95
90
86.4
85
84.4
84.3
81.8
80
81.0
80.8
79.9
78.3
76.3
75
74.2
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
70
19
Index, 1929 = 100
96.3
S&P Stock Price Index, 1929-1940
100
100.0
78.5
60
58.3
58.3
49.4
47.0
43.7
41.3
40
43.7
38.1
33.2
25.5
19
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
20
19
29
Index, 1929=100
80
Value of New Housing Units Put in Place, 1929-1940
10,000
8528.0
8,000
6549.0
6,000
4767.0
4609.0
4539.0
4128.0
4123.9
4,000
2558.0
2,000
1798.0
1350.0
1128.0
19
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
0
19
29
Millions of dollars
7236.0
Farm Price Parity Ratio, 1929-1940
(Ratio of prices paid to prices reveived)
100
92.0
90
88.0
83.0
81.0
80
78.0
77.0
75.0
70
67.0
64.0
60
58.0
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
50
19
Index, 1967=100
93.0
92.0
Net Farm Income, 1929-1940
7,000
6152.0
6005.0
6,000
5,000
4361.0
4308.0
4259.0
4414.0
4482.0
4,000
3344.0
3,000
2923.0
2555.0
2032.0
2,000
19
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
1,000
19
29
Millions of dollars
5278.0
Effect of Fiscal Policy on Full-Employment Demand
Hypothetical Example
Actual
Unemployment rate
GDP
Income tax receipts
8%
800
Full
employment
4%
1,000
8
10
Military spending
10
10
Budget surplus
-2
0
+3.6
+2
Effect on FE demand
= Military spending
- 0.8*tax receipts
Effect of Fiscal Policy on Full-Employment Demand
(% of Full-Employment GDP)
Estimates of E. Cary Brown
Year
Federal
State-local
Total
1929
1930
1931
1932
-0.4
0.0
1.7
1.0
1.8
2.0
1.8
0.9
1.4
1.9
3.6
1.8
1933
1934
1935
1936
1937
1938
1939
0.5
2.0
1.9
2.5
0.1
1.2
1.4
0.1
-0.4
-0.3
0.2
0.1
0.0
0.5
0.5
1.5
1.6
2.6
0.2
1.2
2.0
State-local Receipts, Expenditures, and Budget Surplus, 1929-1940
10,000
6,000
4,000
2,000
0
Surplus
Receipts
Expenditures
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
-2,000
19
Millions of dollars
8,000