“Signs of the times: French premier shot and killed by a fanatic.

3. “Signs of the times: French premier shot and killed by a fanatic. Five people killed in Chicago Communistic rioting. Community chest drive opens tomorrow with much greater needs and little chance of getting it. Dr. Philo[a Youngstown rabbi] chooses as his topic last night ‘If I were dictator of the U. S.’ He makes numerous radical statements.” -- diary entry, May 9, 1932 by Benjamin Roth, from “The Great Depression: a Diary,” page 53.

4. Source: Harold Cole and Lee Ohanian, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, Journal of Political Economy, August 2004. p. 780.

8. “Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character.” -- Grover Cleveland, vetoing a bill to distribute $10,000 worth of grain to Texas farmers after a drought.

9. Economic upheaval before the great crash of 1893 • The building of giant factories, • The rise of big joint-stock companies, • Very hierarchical organization of labor and the development of an impersonal labor market, • Surge of immigrants into the cities, • The movement of huge numbers of freeing slaves into the labor force and the destruction of the plantation economy of the South.

10. The humblest citizen in all the land when clad in the armor of a righteous cause is stronger than all the whole hosts of error that they can bring. I come to speak to you in defense of a cause as holy as the cause of liberty—the cause of humanity…When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman. The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world…It is for these that we speak. We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came. We beg no longer; we entreat no more; we petition no more. We defy them!... You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country…If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold. - William Jennings Bryan, speech, Democratic National Convention, Chicago (1896)

11. “There are no thrills while he reigned, but neither were there any headaches. He had no ideas, and he was not a nuisance.” -- H.L. Mencken, on Calvin Coolidge.

12. Calvin Coolidge in his own words • “All liberty is individual” – speech, 1924. • “The chief ideal of the American people is idealism. The chief business of the American people is business.”

13. “Our mass of regulation of public utilities in our legislation against restraint of trade is the monument to our intent to preserve equality of opportunity.” -- Herbert Hoover, American Individualism

16. Total investment relative to trend, 1934-1939 Source: Harold L. Cole and Lee H. Ohanian, New Deal Policies and the Persistence of the Great Depression: A General-Equilibrium Analysis, Journal of Political Economy, 112 (4), August 2004, 779-816.

17. Private Investment during the first impression, 1929-1933 • 1931-1933, total corporate profits are actually negative. • A now discontinued stock index called the Standard Statistics Index falls by 80% between 1929-1932. • Property and proprietary income fall between 1929and 1933 from 41% to 27% of GDP.

18. Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money. On account of numerous bank failures, the people who have money are afraid to spend it and are buying government securities. From the extreme of speculation in 1929 people have now turned to the extreme of caution. - Benjamin Roth, July 10, 1931.

19. The town is stunned by the news that the Home Savings and Loan Company has suspended payments and would demand 60 day notice of withdrawals. This is followed quickly by similar announcements from The Federal Savings And Loan Company and The Metropolitan Savings And Loan Company. All of these loan companies paid 5 ½ % on savings deposits and earn their money by lending on real estate. With the coming of the depression people stopped payments on their mortgages – mortgages became frozen andthe banks had no way to get cash. Mortgages are a safe investment but cannot be liquidated quickly and are not a good investment for a bank which has agreed to pay out its deposits on demand. For the past three days, these institutions have been besieged by hysterical depositors demanding their money. I am only afraid that the banks will become more stringent in their collections and that foreclosures will become the order of the day. Wheat sells today at $.45 and corn at $.42. This is the lowest since 1855. I went to the fruit market house this evening. It was almost deserted. The farmers cannot sell their produce because men are not working and it has become popular for each family to have its own vegetable garden. -- Benjamin Roth, August 5, 1931.

20. The basic money identity • PV=MQ

22. Whats the meaning of this queue Toiling down the avenue? If by fasting visions come why not to a hungry bum? Idle, shamed and underfed waiting for his dole of bread. What if he should find his head a candle of the holy ghost? A dim or starveling spark at most. But yet a spark? It needs but one. A spark can creep, a spark can run; suddenly a spark can wink and send us down destructions brink. It needs but one to make a star, or light a Russian samovar. One to start a funeral pyre, one to cleanse the world by fire. What if our breadline should be the long slow march of destiny? - Florence Converse, “Bread Line,” The AtlanticMonthly, Jan. 1932.

23. It is not the function of the government to relieve individuals of their responsibilities to their neighbors, or to relieve private institutions of their responsibilities to the public, or local government to the states, or of state governments to the federal government… It is vital that the programs of the government shall not compete with or replace any of them but shall add to their initiative and their strength. It is vital that by the use of public resources and public credit in emergency the nation shall be strengthened and not weakened… It is only by this release of initiative, this insistence upon individual responsibility, that there accrue the great sums of individual accomplishment which carry this nation forward. -- Herbert Hoover, August 1932.

24. Three theories of financial bubbles and crashes Irrational: They happen because rising markets acquire their own nonsensical momentum, as investors begin to assume that prices will go up only because they have for so long, rather than because of market fundamentals. (Believers in this theory often refer to the popping of these bubbles as “financial panics, while the preceding bubbles are sometimes called “manias.”) Rational: They happen because of novelty – a very important, economy-wide new technological breakthrough, a country undergoing substantial economic reform, or a country embracing globalization for the first time. This leads to a combination of great potential overall and great uncertainty about the details, which may generate these widespread bubbles and sudden crashes. It is a particular kind of uncertainty that generates these events. Monetary: Artificially easy money causes speculative pressure on such tangible assets as stocks and real estate, and an overall artificial economic boom. Excessively “long” investment from excessively low interest rates, which make it cheap in terms of future wealth to acquire wealth today, is sometimes said to be part of the problem. Either way, dubious investment projects are pursued because investors mistake easier credit for greater availability of savings (the trading of consumption now for consumption later), since both manifest themselves as lower interest rates. This continues until investors discover that the demand for much of the new investment is not there, and the bubble pops.

27. 2008 stock declines and degree of country transparency

28. So what caused the crash? • According to the irrational theory, investors’ “animal spirits” shifted downward, after foolishly sustaining the 1920s boom. • According to the rational theory, the 1920s were a period of tremendous technological ferment, generating a classic potential/uncertainty bubble. • According to the “Austrian” theory, the easy money of the late 1920s created the conditions for a crash.

29. “The economy of the 1920s underwent major structural changes. New industries using new technologies became the leading sectors, and the system of industrial finance was totally changed. Confidence in prosperity based on these new industries was not misplaced, but there was no past experience to evaluate the profitability of emergent companies, such as GM or RCA. Parallel to the unification of the railroads in the 19th century, utilities in the 1920s were combining to create regional and national networks.” - White, Eugene A. “Are There Any Lessons from History?” In Crashes and Panics: The Lessons from History (1990).

30. But what made the depression “Great”? • Banking collapse (Milton Friedman) • The economy becomes “stuck” in a long-term low-output equilibrium (John Maynard Keynes) • Both Hoover and Roosevelt increased uncertainty dramatically through misguided intervention. (To be taken up in Unit III.)

31. Source: Milton Friedman and Anna Schwartz, A Monetary History of the United States (1963)

33. Keynesian economics: • Is Newtonian and mechanistic. It suggests straightforward answers for any kind of economic slump. • Ignores the role of prices, which govern resource allocation among activities, which in some sense is the whole point of economics. • Suggested remedies that were tried to a significant extent.

34. Two core assumptions of modern economics: • People are rational; in other words, they respond to incentives so as to advance their interests as they see them. • Markets clear; at a prevailing price, excess demand elicits more production at higher prices, excess supply does the opposite.

35. Say's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say (1767–1832), which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of real income is created in order to purchase the economy's entire output. That is to say, the total supply of goods and services in a purely free market economy will exactly equal the total demand during any given time period – in modern terms, "there will never be a general glut,"though there may be local imbalances, with gluts in one market balanced by shortages in others. - Wikipedia definition of Say’s Law

36. The Walrasian auctioneer is a notion from economic theory through which prices are adjusted to clear excess demand and supply in each market.

37. Keynes’ theory of the Depression. • Ordinarily economy is homeostatic. But in unusual circumstances, it may be subject to deviation-amplifying shocks that leave it in persistent depression. • Keynes is not crystal-clear on how such a thing might happen. But he does argue that prices fail, for a variety of reasons, to properly coordinate activities across time.

38. The interest rate is an intertemporal price, i.e. a price reflecting the rate at which wealth in different periods of time trades. A high interest rate means that to get your hands on wealth today you must give up a lot of future wealth, and a low interest rate means the opposite.

41. “Collective effort built this; the inference is inescapable; but we sometimes attempt to avoid the logical further inference that more collective effort is needed. Sometimes we say that what we need is more individual enterprise. No individual ever built a skyscraper.” -- R. Rexford Tugwell, Thomas Munro and Roy Stryker, American Economic Life(texbook, 1925).

42. “Take Incomes from where they are and place them where we need them.” - R. Rexford Tugwell, January 1933.

43. “Again I witnessed happenings today that will be long remembered in the history of Youngstown and the state of Ohio. Without any warning this morning 69 banks in Ohio including three in Youngstown restricted withdrawals to approximately 5% of deposits. All day in the Union National Bank bedlam reigned with hundreds in line clamoring for money. There was no violence but I saw one woman faint. The same thing was happening in every other city of Ohio. The governor immediately called the state Legislature together to pass a restrictive banking law.” -- Benjamin Roth, February 27, 1933.

44. Initial wave of actions • Bank holiday • Pecora hearings/securities laws • The gold standard • Taxes and spending.

46. New taxes under the New Deal • Reinstatement of beer/wine taxes after Prohibition repealed. • Jan. 11, 1934 – doubling of liquor tax. • Higher gasoline and tobacco taxes. • National Industrial Recovery Act – 5% tax on corporate dividends, 5% tax on “excess profits” higher than 12% of stock value. • Agricultural Adjustment Act taxed food middlemen, and farmers who violated production quotas. • Revenue Act of 1934 – higher income taxes. • Revenue Act of 1935 – higher estate taxes, specifically targeting what FDR calls “the transmission from generation to generation of vast fortunes.” • 1936 – Progressive tax on investment, i.e. “undistributed profits.”

47. New public spending • Civilian Conservation Corps, March 1933 – put people to work doing outdoor jobs in national parks and elsewhere. • Federal Emergency Relief Act, May, 1933 • Public Works Administration, June 1933 – hired people to build roads, schools, dams, warships. Among its projects were Grand Coulee Dam, Florida Keys causeway, Triborough Bridge in NYC. • After 1934 election, Emergency Relief Appropriations Act and Public Works Progress Administration authorized.

48. ‘Now, my friends, you have heard me read how a great New York newspaper, after investigations, declared that all I have said about the bad distribution of this nation’s wealth is true. But we have been about our work to correct this situation. That is why the Share Our Wealth societies are forming in every nook and corner of America. They’re meeting tonight. Soon there will be Share Our Wealth societies for everyone to meet. They have a great work to perform. Here is what we stand for in a nutshell: Number one, we propose that every family in America should at least own a homestead equal in value to not less than one third the average family wealth. The average family wealth of America, at normal values, is approximately $16,000. So our first proposition means that every family will have a home and the comforts of a home up to a value of not less than around $5,000 or a little more than that. Number two, we propose that no family shall own more than three hundred times the average family wealth, which means that no family shall possess more than a wealth of approximately $5 million—none to own less than $5,000, none to own more than $5 million. We think that’s too much to allow them to own, but at least it’s extremely conservative. Number three, we propose that every family shall have an income equal to at least one third of the average family income in America. If all were allowed to work, there’d be an income of from $5,000 to $10,000 per family. We propose that one third would be the minimum. We propose that no family will have an earning of less than around $2,000 to $2,500 and that none will have more than three hundred times the average less the ordinary income taxes, which means that a million dollars would be the limit on the highest income. We also propose to give the old-age pensions to the old people, not by taxing them or their children, but by levying the taxes upon the excess fortunes to whittle them down, and on the excess incomes and excess inheritances, so that the people who reach the age of sixty can be retired from the active labor of life and given an opportunity to have surcease and ease for the balance of the life that they have on earth. We also propose the care for the veterans, including the cash payment of the soldiers' bonus. We likewise propose that there should be an education for every youth in this land and that no youth would be dependent upon the financial means of his parents in order to have a college education.“ - Huey Long, radio address, April 1935.

49. Two key assumptions behind the National Industrial Recovery Act(and much of the first New Deal) • Production enterprises, private or public, must inevitably be big. Bigness can be a threat in unregulated private hands, but can be an opportunity if properly directed and controlled. • Competition is often a socially destructive force, and cooperation is preferable.

50. Four key provisions of the National Industrial Recovery Act • The federal government was empowered to regulate hours worked and wages; • Authorization of closed shops if a majority of workers voted for union representation; • The federal government would facilitate and oversee cartels of labor and management to fix prices and wages in an effort to stop deflation and what Roosevelt called “unfair competition and disastrous overproduction”; • Massive public works spending.