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The New Deal

The New Deal. The New Deal: Outline. Explaining the Depression’s Length Slow Recovery? Fast Recovery? New Deal Legislation World War II: The true fiscal stimulus Martha Olney (U.C. Berkeley) olney@berkeley.edu. The Slow Recovery. Unemployment above 10 % until 1942. Path of Real GDP.

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The New Deal

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  1. The New Deal

  2. The New Deal: Outline • Explaining the Depression’s Length • Slow Recovery? • Fast Recovery? • New Deal Legislation • World War II: The true fiscal stimulus Martha Olney (U.C. Berkeley) olney@berkeley.edu

  3. The Slow Recovery • Unemployment above 10 % until 1942

  4. Path of Real GDP • Real GDP doesn’t return to trend until 1941

  5. Was length due to fiscal policy? • Fiscal stimulus essentially absent until WWII • Deficit (–) or Surplus (+) • AD only when budget surplus decreases or budget deficit increases

  6. Discretionary fiscal policy untried • Here, as % of full employmentGNP • Deficit (+) or Surplus (–) • Expansionary policy could have helped: • 1931 & 1936 deficit expansion due to payment of Veterans’ Bonus • Increased consumer spending resulted

  7. Was length due to monetary policy? • Friedman & Schwartz: Fed inaction

  8. Investment Falling Textiles Iron & Steel Lumber Investment Rising Appliances Chemicals Processed Food Petroleum Tobacco Was length due to structural change? • Michael Bernstein

  9. Why Recovery Was So Fast • Christina Romer • Rapid GNP & money supply growth

  10. Comparing Fiscal & Monetary Policy

  11. New Deal Legislation • FDR goals • Relief • Recovery • Reform • Mostly legislative • Limited fiscal stimulus

  12. New Deal: Banking & Finance • Bank Holiday, 3/6/1933 • Glass-Steagall Act (1933) • Banking Act (1933) • Bank Act (1935) • Securities & Exchange Act (1934)

  13. New Deal: Industry • National Industrial Recovery Act (NIRA, 1933) • National Recovery Administration (NRA, 1935)

  14. New Deal: Agriculture • Agricultural Adjustment Act, (AAA, 1933) • Agricultural Adjustment Act, (AAA, 1938)

  15. New Deal: Labor • Works Progress (Projects) Administration (WPA) • Public Works Administration (PWA) • Civilian Conservation Corps (CCC) • Federal Emergency Relief Act (FERA, 1933), which included

  16. New Deal: Labor • Federal Emergency Relief Act (FERA, 1933) • National Labor Relations Act (NLRA, Wagner Act, 1935) • Fair Labor Standards Act (1938)

  17. New Deal: Labor, continued • Federal Emergency Relief Act (FERA, 1933) • National Labor Relations Act (NLRA, Wagner Act, 1935) • Fair Labor Standards Act (1938) • Social Security Act (1935)

  18. World War II Mobilization • Federal budget deficit increased . . . lots! • From $3 billion Less than 3% of GDP • To over $50 billion over 30% of GDP

  19. War Finance: Bonds • WWII paid for with • Taxes 46% • Borrowing 54% • Borrowed from • Households 23% • Banks 40% • Nonbank institutions 37%

  20. War Finance: Bonds

  21. Interest Rates Kept Low • In 1942, the Fed promised the Treasury: • “We will keep nominal rates low” • Promise ends in 1951 with “Accord”

  22. Labor Force Changes • 1940 • Labor Force = 32 million • 1943 • Labor Force = 42 million • Military = 9 million • Where did all those people come from?

  23. Rosie the Riveter • Was Rosie a housewife drawn into the labor force by patriotic appeal? • No. • Rosie the Riveter was often a woman with previous manufacturing experience, not a housewife.

  24. Women Aided the War Effort

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