After the Great Depression: Economic Policies

1. After the Great Depression:Economic Policies By Maria Guida

2. The End of The Great Depression • The Great Depression lasted from 1929 until 1939 • During this period, various reforms were enacted to help rebuild the country and the economy • In 1939 World War II broke out in Europe • During the first few year of the war, the United States remained neutral, concerning itself with domestic defense • In early 1941, the US began to sell arms to the Allied forces • The United States did not enter the war until December 1941, after the Japanese bombing of Pearl Harbor • Many economists and historians believe that World War II is really what propelled the United States out of the Great Depression

3. US Economy During World War II • Unemployment rate decreased due to the demand for wartime production • Many men were drafted into the military forces • This allowed women the opportunity to enter the workforce; in particular, women began working at factories making war products • Overall economy was on an upswing

4. US Gross Domestic Product: 1910 – 1960

5. The Glass-Steagall Act • In 1933, the Glass-Steagall Act was set in place in order to protect the money of bank depositors • This act restricted banks from investing depositors’ money in the financial market; stocks, bonds • The money could be used for loans; personal loans, mortgages • This act formally established the Federal Deposit Insurance Corporation • The FDIC insures depositors’ money in a bank up to a certain amount • In 1934, a depositor was insured up to $2,500 • Today, a depositor is insured up to $250,000

6. Origins of Bretton Woods • After World War I, nations attempted to revive the gold standard • The gold standard is a system in which the unit of account is gold • However, with the onset of the Great Depression, it collapsed entirely

7. “The economic health of every country is a proper matter of concern to all its neighbors, near and far.”— U.S. President Franklin D. Roosevelt at the opening of The Bretton Woods Conference

8. United Nations Monetary andFinancial Conference • July 1 – 22, 1944 • Bretton Woods, New Hampshire • 730 delegates from 44 Allied Nations attended • The conference was set up to regulate international monetary and financial order • As a result of the conference, the Bretton Woods system of exchange rate was set up • Also set in place were the World Bank Group and the International Monetary Fund

9. Bretton Woods • An international monetary system that set rules for financial relations between nations • Goal: make currencies interchangeable at stable and predictable exchange rates • Proponents of this plan also believed that an international economic system would promote and maintain world peace • This system ran from 1944 – 1971, but did not become operative until 1959 • This was when European currencies became fully convertible

10. How it works… • Under this system, the central banks of other countries were obliged to maintain fixed exchange rates between their currencies and the dollar • This was done by intervening in foreign exchange markets • For example, if one country’s currency is too high relative to the dollar, its central bank would sell its currency in exchange for dollars • This drives the value of the country’s currency down • And vice versa, if the value of a country’s currency is too low, the country would buy its own currency • This drives the value of the currency up

11. Bretton Woods: Currency Exchange Before After • Floating exchange rates • The value of foreign currencies was set by the gold standard • Many countries would print money that they did not back up with gold • This led to a devaluation of currency • Adjustable peg currency rates • The value of currencies was determined in relation to the US dollar, which was set on the gold standard; all currencies were fixed to the US dollar • The American dollar was set as the backbone of international exchange

12. Bretton Woods Pros Cons • The rate of inflation was lower on average • Exchange rates were more stable compared to preceding periods • There was an expansion of international trade and investment • The tight controls implemented by this policy limited international capital flows • Market forces change the exchange rate; many countries were unwilling to allow their exchange rates to adjust • Only the United States was required to convert its domestic currency to gold

13. The World Bank Group • The World Bank Group is a collection of different organizations that focus on helping developing countries in areas of human development, agriculture, and infrastructure by providing financial support • It is composed of five organizations: • International Bank for Reconstruction and Development • International Development Association • International Finance Corporation • Multilateral Investment Guarantee Agency • International Centre for Settlement of Investment Disputes

14. International Bank for Reconstruction and Development (IBRD) • Member of the World Bank Group • Original goal: International organization set up to financially help nations reconstruct after World War II • Current goal: Fight poverty by helping financially impoverished states • Financed by payments made and regulated by member states • IBRD primarily serves middle-income countries • IBRD also provides loans to governments at affordable interest rates • All members of IBRD are also member of IMF

15. International Development Association (IDA) • Member of the World Bank Group • Provides help and support to the world’s poorest countries • It provides interest-free loans to 80 of the world’s poorest countries • These loans help improve education, health services, clean water supply, and institutional reforms • The ultimate goal is to achieve economic growth by reducing poverty, and creating jobs and better living conditions

16. IBRD loans and IDA credits in 2005

17. International Monetary Fund • International organization that regulates the global financial system by using the economic policies of its member countries • In particular, policies dealing with exchange rate and the balance of payments • Formed with the objective of stabilizing international exchange rates, promoting open markets and economic growth • Does this by using the money deposited into the fund by member countries and lending it to countries experiencing economical difficulties

18. International Monetary Fund Pros Cons • Encourages open markets and a more globalized economy • Promotes high employment rates which leads to further economic growth • Stabilizes currency exchange rates • The International Monetary Fund only guaranteed stabilization loans up to a certain amount • If an exchange rate began to fall rapidly, the fund would not be able to sufficiently boost the value of the currency

19. Currency Exchange Today • The Bretton Woods System ended in 1971, when President Nixon canceled the convertibility of the US dollar to gold • Today, currencies have returned to the floating exchange rate • How does the US dollar fare today? • 1 US Dollar = .7402 Euros • 1 US Dollar = .6292 Pounds • 1 US Dollar = 83.375 Yen

20. Economic Aftermath • The Great Depression had many effects on the economic policies of the United States and on many other countries throughout the world • The lessons learned from this period in history will continue to impact the world and future economic policies