Americas ManicDepressive Decades: The Twenties and Thirties

1
Americas Manic-Depressive Decades The Twenties
and Thirties

• Why did a decade
• of apparently limitless economic advance
• dissolve into a decade
• of baffling and frustrating depression?
• Mary Oppegard
• September 2004

2
Major Economic Characteristics of the
1920s

• 1920 census first time more Americans live in
  cities and towns than on farms.
• Labor unrest results in strikes after WW I, but
  booming prosperity and rising wages from consumer
  demand result in decline in union activity.
• Farm overproduction during WWI hedgerow to
  hedgerow leads to over supply and agricultural
  depression in Middle America
• Fordney-McCumber Tariff raises taxes on imports
  to its highest level ever, almost 60 (p.437)

3
Plus, Dramatic Rise
in the US Standard of Living (pp. 386-396)

• America discovers buy now, pay later the
  installment plan. Credit which had been
  corporate now becomes personal as well.
• Ford brings out the Model A, double the price of
  the Model-T, sells its credit plan as well. Auto
  use flourishes. 80 of all the automobiles in the
  world were in the US.
• Federal Highway Act begins national highway
  system Route 66.
• Cars take Americans to the suburbs.

4

• Housing industry booms.
• Electricity fills American homes with lighting,
  as well as powering appliances such as irons,
  sewing machines, and ice boxes.
• Modern advertising takes off, using psychology to
  target consumers. Rise of slogans, brand names.
• Mass Media takes off, tabloids, magazines, and
  the first radio station, KDKA Pittsburgh.
• Playing the stock market on margin (credit)
  becomes more widespread (p. 414, 415)

5
Clouds on the Economic Horizon at the End
of the 1920s

• Warnings that the major characteristic of market
  economies is that they are cyclical, i.e. what
  goes up must go down. (Four stages of business
  cycle expansion or recovery, peak, contraction
  or recession, and trough, p. 416-420)
• Bad distribution of income The top 1 of
  Americans who held 32 of nations wealth in
  1922, had increased their share to 38 by 1929,
  i.e. the rich were getting more of the economic
  pie, and the rest were getting less.

6

• Adherence to a gold standard meant that there was
  no easy way to increase money supply.
• Over expansion and consumption due to increased
  use of credit by 1925, 75 of autos, 70 of
  furniture, 75 of radios, 90 of pianos, 80 of
  phonographs, and 80 of household appliances were
  purchased on installment credit. Between 1921
  and 1929, prices rose 45.6.
• Result excess industrial capacity and saturation
  of the market for new consumer durables

7

• Bad banking structure resulted in epidemic bank
  failures. The banks of last resort were
  private banks who issued 24 hour call loans.
  (p. 426)
• Hawley-Smoot Tariff (1930) makes trade situation
  even worse problems with foreign trade resulted
  from US high tariffs which slowed down US exports
  and also meant other countries could not purchase
  US goods.

8
Some How Comes?

• If many Americans felt that the goose had laid
  the golden egg in the 20s, how come they were
  getting rotten scrambled eggs in the 30s?

9

• If the 20s were roaring and exuberant, how come
  the 30s were so depressed?

10

• And
• If the Federal Reserve had been around for 20
  years and was touted to be the answer to US
  banking problems, how come it couldnt or didnt
  prevent the depression and why was it unable to
  end it?

11

• The answer is.
• We dont know for sure!

12
BUT, We do know ..

• In 1907 a severe Panic threatened a complete
  collapse of the U.S .monetary system.
  Catastrophe was averted by one man, financier J.
  P. Morgan, who acted as a one-man central
  bank of last resort.

13

• When it was over, there was widespread agreement
  that a new institution was necessary. It took 6
  years for a coalition of bankers, businessmen,
  and politicians to finally come up with a
  compromise -- the Federal Reserve Act of 1913.

14

• It gave the nation a quasi-governmental central
  banking system and made Federal Reserve notes the
  national currency. Nominally the systems
  control was vested in the Federal Reserve Board,
  but the 12 District Federal Reserve Banks had a
  good deal of autonomy.

15

• Although the Fed was successful in providing
  enough credit to finance World War I, it was not
  strong enough to control credit during the 20s
  or support the banking system during the 30s.

16

• Furthermore, the United States had never had a
  deficit except during war time. It took the
  reforms of the New Deal to make the Federal
  Reserve the power house it is today to control
  the supply of money, and hence the US economy.

17
A mini-lesson on the money supply and why it is
so important

• Money supply, the amount of money circulating in
  the nations economy, is the key element in
  determining interest rates and prices.
• The nations money supply is controlled by the
  federal government by use of fiscal policy and
  monetary policy.

18

• The Congress controls fiscal policy by
  raising/lowering taxes, and raising/lowering
  spending. This is sometimes called Keynesian
  policy because John Maynard Keynes advocated this
  in the 1920s and 1930s. He also advocated
  deficit spending when needed to get the economy
  going again during a recession.

19

• Keynes Theory
• Recession policy Decrease taxes, increase
  government spending
• Inflation policy Increase taxes, decrease
  government spending

20

• Monetary policy is controlled by the Federal
  Reserve. Monetary policy has three tools
• Reserve Requirement
• Open Market Operations
• Discount Rate

21

• Tools of Monetary Policy
• Reserve requirement Money that banks must hold
  in reserve, and may not loan out
• Open Market Operations Sale of bonds the most
  frequently used monetary tool
• Discount rate The interest rate the FED charges
  member banks

22

• Monetary Policy
• Recession policy Decreases reserve requirement,
  buys back government securities, lowers discount
  rate
• Inflation policy Increases reserve
  requirement, sells government securities, raises
  discount rate
• Milton Friedman is the leading US monetarist.

23

• The period from 1935 to the 1970s was largely
  dominated by fiscal policy. Since the 1980s,
  monetary policy has predominated.

24

• And last, what are the major laws enacted during
  the 1930s to reform the nations banking and
  finance system?
• Emergency Banking Act
• Glass-Steagall Banking Act
• Federal Deposit Insurance (FDIC)
• Federal Securities Act
• Federal Trade Commission (FTC)
• Security and Exchange Act (SEC)
• Gold Reserve Act

25
Americas Manic-Depressive Decades The Twenties
and Thirties

• This Mini-Lesson was prepared by Mary Oppegard
  for Putnam City Social Studies Teachers,
  September 24, 2004.
• Page references are to Holt, Rinehart, Winston
  The American Nation Civil War to Present.