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CAPITALISM IN PRACTICE • Pure capitalism in its traditional form encountered problems • Some of these problems, as well as solutions to these problems, will be what we examine then next few days. • The subsequent changes that capitalism encountered further developed the idea of a mixed economy. Problems with American Capitalism • • The ideas of individualism and economic Darwinism were carried to extremes in the United States prior to the Depression A small number of men, such as J. D. Rockefeller and J. P. Morgan, were becoming extremely wealthy. This small group of men monopolized the wealth and economic power in the United Sates. They were able to control large sections of the economy because of their shrewd business dealings. • The accumulation of wealth by a few, such as Rockefeller and Morgan, meant poverty for many STOCK PRICES - 1929 - • People who had been rich before the stock crash in 1929 were left penniless with the coming of the Depression. • The strongest did not always survive. • Some of the ideas that had formed the backbone of capitalism were being questioned. • People needed help, and many people started to look to the government to provide that help. The Business Cycle • One of the major problems capitalist nations must constantly deal with is an economic event known as the business cycle. • This means that the economy will go through periods of boom (good times) and bust (bad times). • In the United States there was a boom during the 1920s. Boom Period of Economic Expansion Overall GNP GNP: gross national product, the total value of all goods and services produced in a country in one year. It is hoped a steady moderate increase will occur in a given year. Period of Economic Decline Period of economic decline Bust (Depression) Bust (depression) • The decade of the 1920s was referred to as the roaring twenties. • The economy was doing well; people were spending money and they were happy. • But the stock market crash of 1929 signaled an end to the boom. • The business cycle had encountered a major problem for which it did not seem to have answers. PROSPERITY Share Share prices fall PANIC! - PANIC! Less Trade Less Money for Banks Many Factories Close High Unemployment Less Spending Power Power More Factories Close Even More Unemployment DEPRESSION "BOOM" Characteristics • • • • full employment high inflation high investment high demand "BUST" Characteristics • • • • high unemployment low inflation low investment low demand • Unemployment during the Depression shot up to unbelievably high rates. • 1929: % of U.S. unemployed was 3.2% • 1932: % of U.S. unemployed was 23.6% • The result of this extremely high rate of unemployment was an unhappy and desperate population • • • • The American president at the time of the Depression, Herbert Hoover, had offered very little government aid He instead had hoped that the traditional capitalist economic system would revive itself without too much help. Hoover did not want to spend too much money helping the economy because he wanted a balanced budget. Interest rates were raised to discourage investment rather than lowered to encourage spending and investment. Roosevelt and the New Deal • • • • • • In 1932 the American people elected a president who was offering the electors and the nation a New Deal. His name was Franklin D. Roosevelt. He was elected because they were prepared to try anything to break out of the Depression. Roosevelt began immediately and over the first one hundred days in office he set up a number of alphabet agencies. These agencies were going to be used to put people back to work. He felt that by using capital work projects to employ people the economy would grow strong and the flow of money would begin again.