FDR%20and%20His%20Times%20FDR

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FDR and His TimesFDRs Economic Programin
the Great Depression

• Lecture by Robert M. Coen
• Professor Emeritus of Economics
• Northwestern University
• Alumnae Continuing Education
• October 18, 2011

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• Lecture Outline
• 1. The economy prior to FDRs inauguration
  1920s zoom, 1930s doom
• Hoovers response to the depression
• Influences on FDRs approach to economic issues
• FDRs search for cures
• The economys performance from 1933-1940
• 6. An assessment of FDRs economic leadership

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Clouds Forming in the 1920s 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
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Share of Income Received by Top 1, 1913-2008
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War Debts Much Owed to US
Allied powers total 12 billion
Britain
5 billion
France 4 billion
Owed to Britain
17 countries
11 billion by 17 countries
France 3
billion Russia
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 1930s, reparations
cancelled, France and Britain default on war debt
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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
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The Great Depression 1929 1932
change Real GDP 977.0 725.8
-25.7 (2005 prices) Employment (private)
34.1 25.1 -26.4 Unemployment rate
2.9 22.9
20.9 Price level 100.0 76.7
-23.3 (1929100) Consumer spending 736.6
614.7 -16.5 Investment
spending 101.7 12.9
-87.3 Exports 38.0 20.4
-46.3
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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 Dont interfere with
creative destruction of free market Keep wages
and prices flexible promote competition
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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
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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)
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Influences on FDRs Economic Thinking
Legacy of WWI economic planning and debt
finance Harvard education
Summers in Warm Springs Brain
Trust
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The Brains Trust
Raymond Moley
A. A. Berle, Jr. Rexford G.
Tugwell
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FDR's Search for Cures
Stabilize banking
Emergency employment
Reflation
Reduce home mortgage foreclosures
Deficit spending?
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Economist George WarrenTime Magazine cover,
November 27, 1933Story title The Cabinet
Teachers Pupils
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• Banks Suspending Payments to Depositors
• Suspending
  payments Total
• Year Number Deposits (mil) banks
• 1921-25 582 159
  29,567
• average
• 976 260
  27,742
• 669 199
  26,650
• 1928 499
  143 25,798
• 1929 659
  231 24,970
• 1930 1,352 869
  23,679
• 1931 2,294 1,691
  21,654
• 1932 1,456
  725 18,734
• 1933 4,004 3,601
  14,207
• 1934-40 448 477
  14,534
• average

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Federal Emergency Workers (Mainly WPA and CCC
Workers) Number Effect on unemployment
rate Year 1,000s Without With
Diff 1931 299 16.3
15.7 -0.6 1932 592
24.1 22.9 -1.2 1933
2,195 25.2 20.9
-4.3 1934 2,974 22.0
16.2 -5.8 1935 3,087
20.3 14.4 -5.9 1936 3,744
17.0 10.0
-7.0 1937 2,763 14.3
9.2 -5.1 1938 3,591
19.1 12.5 -6.6 1939 3,255
17.2 11.3 -5.9 1940
2,830 14.6 9.5
-5.1
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Effect of Fiscal Policy on Full-Employment
Demand Hypothetical Example
Full
Actual
employment Unemployment rate
8 4 GDP
800
1,000 Income tax receipts 8
10 Military spending
10 10 Budget
surplus -2
0 Effect on FE demand 3.6
2 Military spending -
0.8tax receipts
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Effect of Fiscal Policy on Full-Employment
Demand ( of Full-Employment GDP) Estimates of E.
Cary Brown Year Federal
State-local Total 1929
-0.4 1.8 1.4
1930 0.0 2.0
1.9 1931 1.7
1.8 3.6 1932
1.0 0.9 1.8
1933 0.5 0.1
0.5 1934 2.0
-0.4 1.5
1935 1.9 -0.3
1.6 1936 2.5
0.2 2.6 1937
0.1 0.1
0.2 1938 1.2 0.0
1.2 1939 1.4
0.5 2.0
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