FDR and His Times FDR’s Economic Program in the Great Depression

1. FDR and His TimesFDR’s Economic Programin the Great Depression Lecture by Robert M. Coen Professor Emeritus of Economics Northwestern University Alumnae Continuing Education October 18, 2011

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

6. Clouds Forming in the 1920’s 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

12. Share of Income Received by Top 1%, 1913-2008

13. 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 1930’s, reparations cancelled, France and Britain default on war debt

16. 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

17. 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 (1929=100) Consumer spending 736.6 614.7 -16.5 Investment spending 101.7 12.9 -87.3 Exports 38.0 20.4 -46.3

18. 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 Don’t interfere with creative destruction of free market Keep wages and prices flexible; promote competition

19. 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

20. 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)

22. Influences on FDR’s Economic Thinking Legacy of WWI economic planning and debt finance Harvard education Summers in Warm Springs Brain Trust

23. The Brains Trust Raymond Moley A. A. Berle, Jr. Rexford G. Tugwell

25. FDR's Search for Cures Stabilize banking Emergency employment Reflation Reduce home mortgage foreclosures Deficit spending?

27. Economist George WarrenTime Magazine cover, November 27, 1933Story title: The Cabinet: Teachers & Pupils

28. 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

31. 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

41. 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 - 0.8*tax receipts

42. 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