New Era to Great Depression

Lec 10 New Era to Depression

RETREAT FROM THE WORLD

Immigration cut drasticly on racist & patriotic grounds & workers fearing job competion

Jews had been coming to US from Palestine faster than entering Palestine

now nowhere to go except Arab lands – Israel and Holocaust enabled

POLITICS 1920 -1928

most of the country still slightly progressive – but progressive in many different ways

Democrats are horribly split culturally - no uniting figure – not a national party

eastern & midwestern big-city ethnic wing - labor progressives – Al Smith

anti-prohibition Catholics Jews –

southern and western rural populist progressives - nativist wing –

anti-evolution (because it is foundation of Social Darwinism) pro-prohibition

suspicious of big-city ethnics

William Jennings Bryan - Scopes Trial –

treated with contempt by cosmopolitan "elite" "boobsoise"

KKK revive – in North too - 1924 4.5 million members

Nativism – anti-black-Catholic-Jewish-cities-permissive-liberal- evolution- prohibition

1920 Republican primaries 3 progressives got almost all the votes

Convention deadlocked.

Republican (GOP) party machinery,

controlled by Eastern & midwest financial & industrial & oil interests

party bosses especially OIL interests take over Republican Convention –

Harding PICKED – Amiable gregarious with grassroots appeal - lazy undisciplined

below average intelligence - no curiousity-

Progressives refuse Vice Presidential nomination – Coolidge tapped

Oil interests pick Interior secretary Fall

Harding knows he's over his depth – depressed by nis friends activities - dies

Teapot Dome Scandal – ENRON of the 1920's

Coolidge “Business of America is Business”

Harding Coolidge economics pro-business and pro-rich, not free-markets –

Agricultural subsidies for agribusiness while small farmers are in a depression

small farmers are even more disadvantaged by subsidies.

small farmer is doomed in the long run.

cannot compete with the large mechanized farms.

FARM ECONOMY

During the war US farmers had done well exporting food to countries upset by war.

Marginal lands were brought into production , yields increased & labor requirements decreased

gasoline powered tractors quadrupled in war years to 85,000 tractors –

almost a million tractors by 1929..

Tractors reduced demand for horse and mule-power.

frees pasture / grazing land for crops or dairy – increasing production even more.

War ends- other countries resumed normal life - huge surpluses

prices slumped dramatically cotton 35cents a pound to 16 cents, corn $1.50 to $.52 a bushel

wool 60 cents to 19 cents/pound.

Just as in manufacturing - overproducton – continuing and increasing - no end in sight.

Farm states in US have disproportionate power in the Senate

(sparsely populated farm states with 18% of the population can elect 51 senators)

so we still subsidize overproduction - huge subsidies for crops and water projects.

Third world and small farmers hurt

Farm population net decline in 1920's

13 million move to cities - especially big cities which have 50% growth

CONCENTRATION OF WEALTH

Harding-Coolidge & Hoover

Tariffs drasticly increased – tax load increased on workers, farmers, & poor

Progressive taxes repealed – estate and excess profits - top rate income tax 73% to 25%

Widening gap between Rich and poor

national wealth doubles but most of increase to top 5% to 10%

from 1922 - 1929 manufacturing wages rise 1.4% while common stocks go up 16.4%

The Top 1/10 of 1% (24,000 families) have same income bottom 42% (11.5 million families)

PROHIBITION (18^th) – US is the only society to outlaw their customary intoxicant

2.6 gal/year just before prohibition .97 gal/year at end Repeal (21^st 1934)

subsidize crime – black Market – Capone

Harry Anslinger, head of federal Prohibition enforcement bureaucracy - needs employment after repeal

Hearst (newspapers) just got German patents on process making paper from wood instead of hemp

Mexican immigrants and Blacks - marijuana is their intointoxicant of choice

Confluendce of economics, race and bureaucracy = "Reefer Madness"

Result late 1990's : In US 39% kids experiment with Marijuana

In Netherlands 3-6% of kids experiment

Prison-Industrial Complex thrives with Moralistic thinking

Women in the 1920's have slightly more freedom & status. They make up ¼ of non-farm labor force Slightly decrease divorce

Spectator sports - boxing and baseball

Movies – sex & exotic adventure – escape from daily life into fantasy

Flight – aviation technology advancing rapidly. Charles Lindberg flys Atlantic solo in 1927.

"Lucky Lindy" becomes incredibly huge celebrity. Princess Di to 10^th power.

All the fluff in the media makes it harder to make people pay attention to politics, economics, etc

first time since Andrew Jackson voting below 50% 1920 even lower 1924

TECHNOLOGICAL / ECONOMIC REVOLUTION

US was experiencing massive productivity growth

interchangable parts &

assembly line &

Fredrick Taylor's efficiency spiked productivity

Manufacturing labor does well enough for the new cheaper toys

Top 60% of Americans have enough money for great new toys

Before WWI a car costs 2 years wages avg worker

by 1929 car costs 3 months wages -

most voters have limited desire for reform – little interest politics

- let the good times roll

AUTO production went from 1000 hours of labor per car to 100 hours with Ford's advances

Ford voluntarily paid $5 /day so his workers could buy his cars – but few other businesses follow

Car goes from utilitatrian to symbolism of comfort, power, beauty, luxury, & status

GM has more marketing savvy - with many models to demonstrate rising status levels

overtake Ford's utilitaian simplicity "any color you want as long as it's black"

Cars make suburbs possible – starting a slow trend of increased economic segregation

sprawl westward

Cars begin liberating a small upper-middle Scott-Fitzgerald-ish youth culture – flappers

productivity rising much more rapidly than earlier ; 1909-1919 7% industry 6% agric

1919-1929 40% industry 26% agric

Electric power and radio are 2^nd most important economic interest by 1929 –

A stock boom like the internet

Electric causes great continuing increase in productivity

Radio explodes after the war – with nationwide broadcast networks that can unify the nation –

4.5 million radios a year by 1929

Hoover did NOT believe in Laissez Faire –

but in active management of social change through informed,

scrupulously limited government action

Hoover much different Harding and Coolidge –

has supported labor and government-business cooperation

Believer in use of social science data

Sees public works as a tool to offset slumps and contractions

"the federal government should use all of it's powers"

Depression in 1921 – makes active efforts – cut working hours from 12 to 8 in steel industry

Reform has been ignored since the entry to the war

wants old age insurance, bank reform, unemployment and accident insurance

Agriculture marketing act – government buys surplus

Hoover has just come into office when the Stock Market crash hits

Does not have time to do much before the Crash

Hoover is handicapped by the limited nature of the National government

Federal budget then approximately 3% GDP – 20% now

State and local much bigger than Federal – total government 15% GDP –

twice as large as 1914

education, infrastructure, war debts (1/3 total federal spending)

Hoover urges states and private industry to increase construction budgets

Federal public works doubled

State and local do as much as possible

Hoover does not propose big deficits

Federal Reserve is independent of Hoover – cannot force to finance deficits

FDR will be similarly timid – cut spending much too soon after minor hints of recovery

This orthodoxy is powerful before Keynes is accepted

John Nance Garner – Majority leader – balanced budget – to right of Hoover

hinder Hoover's efforts

The extreme of lunacy - Andrew Mellon – cut spending and run a surplus in a depression.

"liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge

the rottenness out of the system. High costs of living and high living will come down.

People will work harder, lead a more moral life."

Even progressives no idea what to do

like bleeding sick people in Medieval times?

Mellon's Social Darwinist "reward the rich" tax policy – which concentrates wealth - is actually a major cause of the depression – lack of demand from consumers

Gold Standard – origin of money in Goldsmiths –

becomes almost religious belief that money will be arbitrary and unreliable

without connection to Gold

"no merchant will know what he might receive by the time his goods were delivered"

Shortage of gold – money supply does not expand to meet increased production

leads to deflaionary economy

Britain goes off Gold in 1931 – moderate recovery in 1932

America / Mellon prefer to let children starve, homes and land foreclosed, etc

Trade-off between bondholders and workers

to counter deflation must go off gold

1932 - Smoot Hawley Tariff – big increase tariff levels

generates similar protectionist moves around the world

Brits create protected area in Commonwealth & colonies

Hoover fails to veto even though he knows it is horrific and will worsen situation

hopes an empowered tariff commission will let him mitigate rates later

Nationalism encouraged everywhere.

Not enough political power or will to veto.

Always easy politically to increase tariffs

every congressman protects his friends

WEAKNESSES IN THE U.S. ECONOMY BEFORE THE GREAT DEPRESSION

Each of the factors present in your strong, balanced economy are necessary and interdependent. If any factor becomes unbalanced, it will effect the stability and strength of the entire structure. If too many factors become unbalanced, the entire economy might collapse.

POOR TAX POLICY CONTRIBUTES TO CENTRALIZATION OF WEALTH–Andrew Mellon, one of the richest men in America, served as Secretary of the Treasury under Harding and Coolidge administrations. Mellon believed that wealth should be rewarded, not punished by high tax rates. By 1929, more than one-third of all personal income belonged to the top 5% of the population. This was problematic, because mass production relies on mass consumption. The rich could spend only so much money; they invested a majority of it, but there was already plenty of productive capacity in 1929–what was needed was more consumption, more markets for the goods already being mass produced.

INDUSTRIAL OVERPRODUCTION–Henry Ford had introduced the idea of the assembly line and mass production to the United States at the turn of the century. Other manufacturers soon followed suit, vastly expanding industry’s productive capacity. But Henry Ford had also increased his workers’ wages to $5 a day, arguing that the workingman should make enough money to buy the car that he worked to manufacture. In other words, he wanted to foster the mass consumption that would support mass production. Few other employers followed Ford’s lead on wages, however. Instead they preferred to maximize their own profits, which served to centralize wealth and undercut mass consumption. .

OVERINVESTMENT IN THE STOCK MARKET–Despite heavy investment in plant expansion and new technology tapering off in the late 1920s, wealthy investors still sought outlets for their surplus capital, and they turned to the stock market. In addition, many small investors hoped to get rich quick by borrowing the capital they needed to buy stocks–this was called buying on margin. In one week in 1929, stock brokers’ loans to such investors rose $137 million. This fueled an incredible rise in the value of stocks. In a little over a year, selected industrial stocks climbed by nearly 200 points on the New York Stock Exchange. But the value of the stocks had no relationship to the actual growth of the nation’s corporations, their value, or the expected dividend of the stockholder.

HIGH TARIFFS HURT BOTH IMPORTS AND EXPORTS–During the 1920s, the United States maintained a high tariff (a tariff is a tax on imported goods), which raised the price of imported goods relative to American-made goods. This made it harder for foreign countries to export their goods to the United States and earn the dollars they needed to pay back loans or buy American goods. The lack of competition with foreign goods also weakened U.S. companies and led to other nations raising tariffs in retaliation on American goods, which hurt the ability of the United States to export goods. So the U.S. had fewer and fewer markets overseas for the mass-produced goods it was making. So U.S. tariff policy hurt the ability of the other countries to buy U.S. goods and to repay U.S. loans and the ability of American companies to export their goods to foreign markets.

BELIEF IN ENDLESS PROSPERITY–Through most of the 1920s, the United States economy as a whole enjoyed unprecedented prosperity. As a result of World War I, the U.S. had become the creditor to the world, and New York City the financial center of the globe. American corporations found ready markets for new inventions like the sewing machine and new cultural products like movies both at home and overseas. This prosperity was reflected in the rising stock market. Increasingly, Americans believed that this prosperity would never end. Their optimism led to widespread buying on credit and helped fuel some of the stock market speculation. However, too many Americans were living on the very edge of their means, vulnerable to any disruption in the economy because they did not have savings to fall back upon.

WEAKNESSES IN THE BANKING SYSTEM–Banks are the backbone of the economy. They supply the credit needed to build homes, farms, and businesses. But to maintain their stability, banks must be careful to ensure that their loans are sound–that there is a good chance that they will be fully repaid or that the value of the investment can be reclaimed if the lender fails to make the payments. But there were very few regulations governing bank loans in the 1920s. Many banks floated loans to stock brokers to support speculation in the stock market. Other loans were made to Germany so that it could make its reparations payments to France and Great Britain, which in turn repaid its war-time loans to American banks. Ultimately, these and other nonproductive loans weakened the banking system significantly.

DESTRUCTION OF NATURAL MARKET FORCES–In the nineteenth century, any gap between production and consumption was solved automatically by natural market forces like the law of supply and demand. Under this law, industry was forced to generate demand by lowering prices. But in the twentieth century, large corporations often manipulated rather than obeyed these natural market forces. Instead of lowering prices or redistributing income, they created artificial needs through advertising; they generated a continuous demand for new goods by bringing out new models or colors each year; and they compensated for a lack of consumer income through new credit mechanisms like installment buying. But these artificial efforts to boost demand were insufficient; by mid-1927, consumer demand had dropped steeply, and business inventories increased 300%.

AGRICULTURAL ECONOMY ALREADY IN DEPRESSION–World War I had created a huge demand for agricultural goods, which led to a sharp increase in farm product prices, and many farmers expanded their production, often taking out mortgages, during this period. But after the war ended, agricultural prices fell sharply. U.S. farmers also struggled with declining soil quality due to overplanting and erosion, especially in the American South. So while the rest of the economy seemed to be booming, agriculture was lagging behind. This also meant that large sections of the country, especially those that were rural, fell behind the rest of the country in terms of modernization and conveniences, such as electricity.

Banks start to fail big-time 1930

Revenue act 1932 - Huge deficits – 60% of federal expenditures - lead Hoover to ask for tax increases

believes it will stabilize Banking syystem and mke loans available for business –

critics call "trickle down" – want to spend directly on public works – but this is a minority view

Farms overproduce – people starving

WORLD DEPRESSION GREAT depression was not ours alone and had huge political effects.

GERMANY- earlier: Because of the punitive treaty: WEIMAR Republic saddled from birth with the ignominy of defeat and the harsh economic and psychological weight of the Versailles settlement staggered and reeled through the 1920s.

Germany defaulted on reparations payments in 1922 and France occupied the Ruhr, Germany's industrial heartland, touching off a fantastic spiral of hyperinflation that rendered the German Mark virtually worthless.

Instead of helping Europeans as in WWII, US had demanded repayment of loans because France would not link forgiveness of debt to cutting reparations

There were some major adjustments in payments mid 1920's so German economy would not be crippled.

Germany had recovered by the late 1920's thanks to loans from US

After WWI US world's biggest creditor BUT Lots of bad debts.

We lend $ to Germany to pay reparations to France & England -

which they use to repay war debt to us.

Delicate artificial house of cards.

.

Leaders know we should forgive debt to let our trading partners recover

but voters everywhere still angry about war

Voters disillusioned and disgusted – politically unpopular everywhere to forgive debt

Remember what General Pershing said last lecture?

"News of the war's end reached Lance Corporal Adolf Hitler in a military hospital in the town of Pasewalk, near Stettin in Pomerania. British rained gas grenades on the German trenches. By morning Hitler's eyes were "red-hot coals," and he was blind. ........

Hitler and his recuperating comrades were informed that a revolution had dethroned the kaiser. The civilian leaders of the new German republic had sued for peace, even while the German army was still intact in the field. For the good soldier Hitler this was "the greatest infamy of this century." Still half blind, he stumbled back to his cot, buried his head in his pillow and wept. Revolution and surrender, Hitler concluded, were the work of depraved Marxist and Jewish criminals. Their infamy must be avenged. "The flush of indignation and shame burned in my cheek," he wrote, and "in the next few days I became conscious of my own fate....I resolved to become a politician."

Hitler, the sulking and penurious Viennese art student, had abandoned his native Austria and fled to Munich to join the German army in 1914. In his military regiment he found the warmth of camradeship that had eluded him in the aching vacuity of his civilian life. The outbreak of war, he wrote, "seemed like deliverance from the angry feelings of my youth."

John Maynard Keynes wrote embittered and astute tract in 1919, The Economic Consequences of the Peace, contained three lethal flaws. It transferred important coal, iron, and steel properties from Germany to France and prohibited their utilization by German industry. "Thus the Treaty strikes at organization," Keynes declared, "and by the destruction of organization impairs yet further the reduced wealth of the whole community."

The treaty, Keynes concluded, insanely perpetuated in peacetime the economic disruptions of the war itself. To the military catastrophe of the fighting was now added the economic burden of a vengeful peace.

As German unemployment mounted to three million persons in 1930, Nazi Party membership doubled. When Germans went to the polls in September 1930, the Nazi vote vaulted to 6.4 million.