How the Party Ended

Problem areas prior to the crash

• Weaknesses in agriculture.

• Weaknesses in traditional manufacturing.

• Concentration of wealth

• Over-extension of consumer credit.

• Speculative mentality.

• Unstable domestic financial situation.

• Unstable international financial situation.

Agriculture

• Tremendous expansion during World War I.

• Government subsidies to encourage production.

• War ends . . . Subsidies withdrawn

• European production increases

• Agricultural sector had over-expanded.

Market price for wheat per bushel:

• 1919: $2.25

• 1929: $1.03

• 1932: $ .39

Weaknesses in traditional manufacturing

• Electricity competes with coal.

• Synthetic materials compete with cotton.

• Poor management.

• Great increases in production.

Weaknesses in traditional manufacturing

• Business consolidation. – 1929: 200 largest companies control 50% of all

corporate wealth.

• Concentration of wealth . . . – Wages went up, but not in "real" terms.

Concentration of wealth

• Wealth of top 1% = bottom 42%

• 71% (120 million) < $2,500 per year

• 12 million < $1,200 per year

Consumer Economy

How do you move inventory ??

• Advertising

• Consumer credit

• "Dollar down, dollar a week."

The Stock Market

• Banks invested significant $$$ in stock. • More individuals were investing than ever before. • 1920s a long "Bull Market." • You "couldn’t loose." • Could buy on margin of 10% • Note: No significant controls on the market or financial

institutions..

Buying on margin . . . • 10% down payment required at time of purchase. • If stock price falls below a set price:

• "Margin Call“ The stock holder must pay off the debt. • Works great as long as the market continues up.

Unstable domestic financial situation

• Consolidation of banking

• 1% of U.S. banks controlled 46% of resources

• No controls on what banks could invest in.

• No such thing as a "guaranteed deposit."

Unstable international $$ situation

Germany

Allies

US

$$

The party's over in October 1929.

What was

"The Depression" ? • Bank failures: (1,300 by December 1930)

• Unemployment

How bad was it ?

• 1932: 13,000,000 unemployed

• Some areas 70-80%

• National wages 40% of 1929 level.

• Economy operating at < half of 1929 level.

Election of 1932

• Hoover (R) vs. Franklin Roosevelt (D)

• Roosevelt wins: – Popular vote: 22.8 million to 15.7 million – Electoral vote: 427 to 59

• Democrats control both houses of Congress.

Who was Franklin D. Roosevelt ?

• Wealthy only child.

• Harvard educated.

• Asst. Secretary of the Navy under Wilson.

• Governor of New York

Why was he elected ?

• Hoover and the Republicans were discredited.

• Somebody had to do something.

• Roosevelt projected confidence.

"The New Deal"

• Addresses:

– Relief

– Recovery

– Reform

• No plan - do what works.

Roosevelt's most important quality: His ability to consider any idea.

"Keynesian Economics"

• John Meynard Keynes

• "pump priming"

• Increased government spending will stimulate the economy.

(Roosevelt probably didn’t understand Keynes.)

Traditional View of the New Deal

• 1st New Deal, "The First Hundred Days" -

• 2nd New Deal

• 3rd New Deal, "Synthesis New Deal"

1st New Deal (early 1933)• Objective: restore confidence.

• Bank "holidays"

• The "Alphabet Agencies" • CCC - Civilian Conservation Corps

• AAA - Agricultural Adjustment Act

• TVA - Tennessee Valley Authority

• NIRA - National Industrial Recovery Act

• PWA - Public Works Administration – large-scale public works

2nd New Deal (1935)

• Focus shift toward reform – FDR seeks to address public discontent – Becomes less cooperative with business

• WPA - Work Progress Administration– Smaller-scale public works projects

• Social Security Act

• National Labor Relations Act (Wagner Act)

3rd New Deal

• 1937 - National Housing Act

• 1938 - Agricultural Adjustment Act

• 1938 - Fair Labor Standard Act Established – minimum wage = 40¢ / hour – maximum workweek = 40 hours

(in businesses in interstate commerce)

Opposition to FDR . . .

• Traditional Republicans

• Father Coughlin

• Huey Long

• The Supreme Court - "Court Packing " scheme

Father Charles CoughlinHuey Long

• The "New Deal" does not work.

– Specifically, it does not pull the

U.S. out of the Depression.

1st New Deal2nd New Deal

3rd New Deal

World War II Korean War

If it didn't work, why is he important ?

• Restores confidence.

• Saves democratic capitalism.

1936 - develops the "traditional" Democratic Party coalition:

• labor

• blacks

• urban voters

• progressives

• By 1938 he had run out of ideas.

• There were some things he would not do.

• Specifically, throw out the idea of a free-market economy.

By 1938 there were important international issues . . .