The Great Depression and the New Deal

1
The Great Depression and the New Deal
2
What role should the government play in trying to
make the economy better?

• Option 1
• Little to none - Laissez-faire
• Theory of Adam Smith
• US Govt during late 1800s
• Option 2
• Improve the business climate - supply-side or
  trickle down
• Republican Presidents of the 1920s

• Option 3
• As much as possible
• Theory of John Maynard Keynes
• FDR the New Deal

3
Adam Smith

• - Little to no government intervention, if left
  alone the economy will recover on its own
• First economist to observe a market economy.

4
Adam Smith?(1723-1790)

• Invisible Hand-? "Every individual necessarily
  labors to render the annual revenue of the
  society as great as he can. He generally indeed
  neither intends to promote the public interest,
  nor knows how much he is promoting it. He intends
  only his own gain, and he is in this, as in many
  other cases, led by an invisible hand to promote
  an end which was no part of his intention. By
  pursuing his own interest he frequently promotes
  that of the society more effectually than when he
  really intends to promote it. I have never known
  much good done by those who affected to trade for
  the public good."(The Wealth of Nations).

5
The Invisible Hand

• used by Adam Smith to describe his belief that
  individuals seeking their economic self-interest
  actually benefit society more than they would if
  they tried to benefit society directly.
• Every job that is necessary for society gets done
  without the government forcing people to do it.

6
Laissez faire

•  An economic theory or principle in which a
  government should not interfere in the economy or
  business affairs.
• This was the policy of the US Government in the
  late 1800s, the time of Rockefeller, Carnegie,
  J.P. Morgan, etc.
• There were no business taxes, no income tax, no
  regulation of business and unions were just
  beginning (and frowned upon).

7
John Maynard Keynes

• In 1936 Keynes published his most important book
  A General Theory of Employment, Interest and
  Money. It revolutionized economic theory by
  showing how unemployment could occur
  involuntarily. In the book Keynes argued that the
  lack of demand for goods and rising unemployment
  could be countered by increased government
  expenditure to stimulate the economy. His views
  on the planned economy influenced President
  Roosevelt's New Deal and Britain's post-war
  Labour Government.

8
Keynesian economic theory

• An economic theory that puts emphasis on
  government spending through increasing government
  borrowing (increasing government debt) in order
  to help the economy weather its usual ups and
  downs. Keynesian economic advocates support the
  use of government intervention to help stimulate
  the economy when it is lagging.

9
Business cycle

•   A wavelike pattern of economic activity with
  alternating periods of economic boom and bust
  prosperity, recession, depression, and recovery.
  The National Bureau of Economic Research
  determines the official peaks and troughs of the
  U.S. business cycle. Also called economic cycle.

10
Business Cycle
11
Depression

• A stage of the business cycle that is
  characterized by high unemployment, low inflation
  and a sharp decline in business activity and
  prices, sustained over a period of time.

12
Recovery

• The phase of the business cycle where the economy
  starts doing better after a slowdown.
  Improvements often begin to show in the level of
  production, rising employment and retail sales.

13
Expansion/ Prosperity

• The preferred phase of the business cycle in
  which production is rising and unemployment is
  low or falling.
• The risk of rising inflation is high

14
Recession

• A temporary decline in business activity,
  typically classified as two consecutive quarters
  of falling Gross Domestic Product.
• Unemployment therefore begins to grow.

15
Fiscal Policy

• The basic tools of fiscal policy are taxing,
  spending and borrowing
• Two types of fiscal policy are supply-side or
  trickle down economic policy and Keynesian
  economic policy

• Relating to public money, in particular to
  government expenditures, revenues, and debt.
• These competing theories are very political!

16
Budget
17
What is the Problem with the Prosperity phase of
business cycle

• Inflation is a constant danger
• Inflation - people have more yet it is worth
  less value.
• Ideal to keep inflation lt 3

18
Who sets interest rates?

• The Federal Reserve Board Sets Monetary Policy
• They decide how much money we should have in
  circulation
• How do we get more money in circulation?
• The Fed lowers the discount rate (interest rate
  that the Fed charges member banks to borrow )
• The Fed also buys or sells existing bonds to put
  more money in or take money out of the US
  economy.
• They also set how much banks have to keep and how
  much they can loan out (RESERVE REQUIREMENT OR
  RESERVE RATIO).

19
Interest rates

• The amount that an individual can earn by lending
  a unit of currency for a year. It is the cost of
  borrowing or the price paid for the use of
  anothers money (normally expressed as a
  percentage per year). There are many types of
  interest rates, such as, car loan rates, mortgage
  rates, and interest rates on different kinds of
  bonds
• A policy used by a government or central bank to
  influence the supply of money and credit in
  private hands, used for controlling inflation.
  The Board of Governors of the Federal Reserve
  System or the Fed is the main agency in the
  U.S. for making monetary policy.

20
How do we limit the growth of prosperity?

• When you increase the amount required for banks
  to keep in reserve you take out of circulation
  and slow down the growth in productivity,
  lessening inflation
• RISK it increase unemployment and create a
  recession.
• It is more challenging to stimulate the economy!

21
Role of Federal Reserve Banks
22
Mixed economy

•  An economic system in which the government may
  be acutely involved in economic decisions by
  taking a role in the economy as a regulator,
  subsidizer, employer, taxer, borrower or
  consumer. The U.S. since the New Deal would be
  considered a mixed economy.

23
Buy stock on margin

• The act of purchasing securities and paying cash
  for only a fraction of the purchase price. The
  remainder of the price is provided by credit
  extended by the broker to the buyer.

24
Economic indicators

• Statistical measurements, rates, and indexes of
  financial and social trends, used to help
  economists and financial analysts determine the
  business growth patterns and the overall
  direction of the economy.

25
FDRs New Deal

• Roosevelt's energetic public personality--"the
  only thing we have to fear is fear itself," and
  his "fireside chats" helped restore confidence.

26
Hoovervilles- Shanty towns of homeless people
(Page 448)

• Some of the men who were forced to live in these
  conditions possessed building skills and were
  able to build their houses out of stone. Most
  people, however, resorted to building their
  residences out of box wood, cardboard, and any
  scraps of metal they could find. Some individuals
  even lived in water mains.

27
100 Days- First days of FDRs administration in
which he employed New Deal policies (Page 457)

• Civil Works Administration - sewer repair

28
Bank Holiday

• Roosevelt hurled the blame at businessmen and
  bankers with religious rhetoric "Practices of
  the unscrupulous money changers stand indicted in
  the court of public opinion, rejected by the
  hearts and minds of men....The money changers
  have fled from their high seats in the temple of
  our civilization."By March 4th all banks in the
  country were virtually closed by their governors,
  and Roosevelt kept them all closed until he could
  pass new legislation. On March 9, Roosevelt sent
  to Congress the Emergency Banking Act, drafted in
  large part by Hoover's administration the act
  was passed and signed into law the same day. It
  provided for a system of reopening sound banks
  under Treasury supervision, with federal loans
  available if needed. Three-quarters of the banks
  in the Federal Reserve System reopened within the
  next three days. Billions of dollars in "hoarded"
  currency and gold flowed back into them within a
  month, thus stabilizing the banking system. In
  all of 1933, 4,004 small local banks were closed
  and were merged into larger banks. (Their
  depositors eventually received 85 cents on the
  dollar of their deposits.)

29
CCC- Civilian Conservation Corps
30
WPA (Works Progress Administration)
31
AAA (Agricultural Adjustment Act)

• Regulates Farm prices and production

32
NRA- National Labor Relations Act
33
NRA- National Labor Relations Act

• Regulates and protects unions

34
Wagner Act

• Regulate and Protect Unions

35
NRA (National Recovery Act)

• Stimulated business by letting industries set the
  prices of their goods (instead of by supply and
  demand)
• It helped raise wages and prices (by setting
  minimum wage and maximum hours of work per week)

36
HOLC- Home Owners Loan Corp.

• Relief for homeowners facing foreclosures

37
TVA-Tennessee Valley Authority
38
REA- Rural Electrification Administration

• Provided electricity to rural areas

39
SEC- Securities and Exchange Commission

• Full disclosure of stock issues provided for
  investors

40
SSA

• Social Security Act
• Unemployment benefits, insurance, and retirement

41
Inflation

• A steady increase in the general level of prices
  of consumer goods and services, or a continual
  decline in the purchasing power of money.
  Inflation is caused by an increase in the
  quantity of currency and credit relative to the
  availability of goods and services. Moderate
  inflation normally occurs as a result of economic
  growth. It is the opposite of deflation.

42
Federal funds rate

• The interest rate that banks charge other banks
  for overnight loans at the Federal Reserve. It is
  closely monitored by market participants and used
  by the Fed to guide monetary policy. A high
  federal funds rate indicates that banks are
  strapped for funds, when low, banks credit needs
  are minimal.

43
Command economy

•  An economic system in which a central authority
  plans and controls price and production
  levels.  The former Soviet Union is an example of
  this economic system, in which rigid central
  planning was used by the state to resolve basic
  economic questions.  It is typically associated
  with Communist states.

44

• Capital markets
• Market in which long-term debt and equity
  securities are bought and sold.
• Stocks  
• Represents equity or part ownership in a
  corporation. Also known as equities.
• Bonds
• A long-term debt security issued by corporations
  and governments offering fixed interest payments
  periodically for a period of more than one year.
  Bonds do not represent ownership rather an
  investor who buys a bond is actually lending
  money to the issuer, to help finance current
  operations and new acquisitions of property,
  plant or equipment.

45
Court Packing - p471

• FDR tries to oust old Supreme Court justices
  so he could appoint judges that supported his
  policies