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Economic Depression

Economic Depression. How can it be fixed, and by what or whom? What is the government’s role during times of economic downturn?. Two opposing theories existed on the causes of and remedies for economic depression that affected governments’ behaviours during and after the Great Depression:

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Economic Depression

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  1. Economic Depression How can it be fixed, and by what or whom? What is the government’s role during times of economic downturn?

  2. Two opposing theories existed on the causes of and remedies for economic depression that affected governments’ behaviours during and after the Great Depression: • The theories of John Maynard Keynes (canes) and Friedrich August Hayek (hi-ek) • They recently worked through their differences in a rap battle! 2 Schools of Thought

  3. VS Keynes Hayek

  4. Make a t-chart to compare the theories of Keynes and Hayek • Read the curriculum handout about economic theories and principles surrounding the Great Depression in Canada and answer the following: • Which economic school of thought would each economist belong to? Your task

  5. Theories are reform liberal • Economy driven by aggregate demand (total demand for goods and services in the economy at a given time and price level) • Government should intervene when the economy is in a downturn, taking actions such as cutting taxes, subsidizing housing, or lowering interest rates so people can have access to spending money. SPEND, SPEND, SPEND! It’s the only way to increase demand! Keynes

  6. Giving people the power to buy will multiply that invested money in the economy (multiplier effect) • WARNING from Keynes: If money being saved is greater than what is being invested – which happens when interest rates are too high – unemployment will rise Keynes

  7. Theories are classical liberal • The “invisible hand” (coined by Adam Smith) of the free market will prevent and cure economic cycles • This is called “laissez-faire” economics (“let it be”) • Government should not control the money supply • Unnatural adjustments of interest rates artificially displace capital (money) • “easy money” causes people to change their normal spending habits, and leads to inflation Hayek

  8. WARNING from Hayek: Socialism (what he believed to Keynesian economics) requires central economic planning and that will lead to totalitarianism • The government will control our social lives! • Despite his laissez-faire beliefs, Hayek did believe that wealthy nations should provide a safety net without endangering freedom – basic food/shelter/clothing Hayek

  9. Because provincial and municipal gov’ts were already in debt from expanding infrastructure and education during the 1920s, economic improvement became the responsibility of the feds • Mackenzie King was PM when the depression began, and he refused to provide aid to the provinces, and only made minor relief efforts (classical liberalism) Relieve yourselves, you bums! Canadian Government Relief Efforts

  10. R.B. Bennett’s Conservatives won the 1930 election, and Bennett also initially refused to offer large-scale relief to the provinces • Bennett advocated for high import tariffs and large-scale gov’t spending as remedies • He eventually was forced to offer some relief to the unemployed • His make-work programs and system of unemployment aid got too large and he had to severely cut back federal spending – this deepened the depression because gov’t employees were laid off and make-work projects stopped Canadian Government Relief Efforts

  11. It wasn’t until Bennett was in danger of losing the 1935 election that he came up with a “new deal,” based on US president Roosevelt’s “New Deal” • Bennett did a series of radio announcements promising the following changes: • Minimum wage • Fair treatment for employees • Marketing boards for farm products • Trade commission to stop price-fixing by businesses • Unemployment insurance • Limited working hours • Health insurance Woah! Please don’t fire me! I’m sorry for not helping you out. Let’s make a new deal. I was going to propose this earlier. Seriously! Bennett’s New Deal

  12. Despite the “new deal,” Bennett was defeated in the 1935 election by his predecessor, Mackenzie King. • King lowered tariffs and signed a new trade agreement with the US, but largely believed in laissez-faire economics • His main goal was to balance the budget but cutting gov’t spending Bennett’s New Deal

  13. To save $, King closed down relief camps and cut aid to the provinces • After studying economics, however, King decided to become more interventionist and spend more $ to get the economy going • Regardless, King pretty much just waited the depression out • The depression officially ended with the start of WWII in 1939 King’s Kuts

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