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Problem areas prior to the crash
• Weaknesses in agriculture.
• Weaknesses in traditional manufacturing.
• Concentration of wealth
• Over-extension of consumer credit.
• Speculative mentality.
• Unstable domestic financial situation.
• Unstable international financial situation.
Agriculture
• Tremendous expansion during World War I.
• Government subsidies to encourage production.
• War ends . . . Subsidies withdrawn
• European production increases
• Agricultural sector had over-expanded.
Weaknesses in traditional manufacturing
• Electricity competes with coal.
• Synthetic materials compete with cotton.
• Poor management.
• Great increases in production.
Weaknesses in traditional manufacturing
• Business consolidation. – 1929: 200 largest companies control 50% of all
corporate wealth.
• Concentration of wealth . . . – Wages went up, but not in "real" terms.
Concentration of wealth
• Wealth of top 1% = bottom 42%
• 71% (120 million) < $2,500 per year
• 12 million < $1,200 per year
The Stock Market
• Banks invested significant $$$ in stock. • More individuals were investing than ever before. • 1920s a long "Bull Market." • You "couldn’t loose." • Could buy on margin of 10% • Note: No significant controls on the market or financial
institutions..
Buying on margin . . . • 10% down payment required at time of purchase. • If stock price falls below a set price:
• "Margin Call“ The stock holder must pay off the debt. • Works great as long as the market continues up.
Unstable domestic financial situation
• Consolidation of banking
• 1% of U.S. banks controlled 46% of resources
• No controls on what banks could invest in.
• No such thing as a "guaranteed deposit."
How bad was it ?
• 1932: 13,000,000 unemployed
• Some areas 70-80%
• National wages 40% of 1929 level.
• Economy operating at < half of 1929 level.
Election of 1932
• Hoover (R) vs. Franklin Roosevelt (D)
• Roosevelt wins: – Popular vote: 22.8 million to 15.7 million – Electoral vote: 427 to 59
• Democrats control both houses of Congress.
Who was Franklin D. Roosevelt ?
• Wealthy only child.
• Harvard educated.
• Asst. Secretary of the Navy under Wilson.
• Governor of New York
Why was he elected ?
• Hoover and the Republicans were discredited.
• Somebody had to do something.
• Roosevelt projected confidence.
"Keynesian Economics"
• John Meynard Keynes
• "pump priming"
• Increased government spending will stimulate the economy.
(Roosevelt probably didn’t understand Keynes.)
Traditional View of the New Deal
• 1st New Deal, "The First Hundred Days" -
• 2nd New Deal
• 3rd New Deal, "Synthesis New Deal"
1st New Deal (early 1933)• Objective: restore confidence.
• Bank "holidays"
• The "Alphabet Agencies" • CCC - Civilian Conservation Corps
• AAA - Agricultural Adjustment Act
• TVA - Tennessee Valley Authority
• NIRA - National Industrial Recovery Act
• PWA - Public Works Administration – large-scale public works
2nd New Deal (1935)
• Focus shift toward reform – FDR seeks to address public discontent – Becomes less cooperative with business
• WPA - Work Progress Administration– Smaller-scale public works projects
• Social Security Act
• National Labor Relations Act (Wagner Act)
3rd New Deal
• 1937 - National Housing Act
• 1938 - Agricultural Adjustment Act
• 1938 - Fair Labor Standard Act Established – minimum wage = 40¢ / hour – maximum workweek = 40 hours
(in businesses in interstate commerce)
Opposition to FDR . . .
• Traditional Republicans
• Father Coughlin
• Huey Long
• The Supreme Court - "Court Packing " scheme
1936 - develops the "traditional" Democratic Party coalition:
• labor
• blacks
• urban voters
• progressives
• By 1938 he had run out of ideas.
• There were some things he would not do.
• Specifically, throw out the idea of a free-market economy.