Economics Unit: 1910s Great Depression

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Economics Unit 1910s- Great Depression

• In this unit you will learn about the business
  cycle, the Federal Reserve and how the government
  conducts its fiscal policy taxing, spending
  borrowing.
• Supply-side economics and Keynesian economics.
• We begin with the presidency of Woodrow Wilson

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Wilson broke tradition to attack the triple wall
of privilege

• Unlike those who preceded him, Wilson appeared in
  person before a joint session of the Congress to
  deliver his proposal to reform the triple wall
  of privilege.
• Wall 1- The Tariff

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Underwood Simmons Tariff Act

• This law lowered the annual tariff rate from 40
  down to 27. His rationale was that his reform
  would cease to enrich US industries that no
  longer needed protection. Overall duties were
  lowered on 900 items. It raised the tariff on
  80 luxury items
• With the authority of the new 16th Amendment, the
  Act also enacted a federal income tax. (For
  example, a married couple earning 5,000 would
  pay about 10.)

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Wall 2 - The Banking System

• Problem 1 - Existing laws at the time did not
  allow for the money supply to expand or contract
  as needed. Since 1870s, increasing output of
  goods services, BUT money supply remained
  constant
• Result deflation or falling prices
• Populists called for cheap money or printing
  more money

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Wall 2 - The Banking System

• Problem 2 - Runs on banks
• At the start of a business panic, depositors
  would literally run to their bank to withdraw
  their deposits before the bank ran out of money
  and went bankrupt.
• Since banks earn profit from the interest that
  they charge on loans, they lend out as much as
  they can to earn more

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Wall 2 - The Banking System

• Problem 2 (continued) -
• At this time, most banks kept their reserves in
  big city banks, which in turn kept their reserves
  in the biggest banks in the country, in the
  financial district of New York City
• These NYC banks, flush with all this cash, lent
  out a lot through on call loans. On call
  loans means that the bank may call in the loans
  to be paid back immediately.
• Many of these on call loans were used by stock
  speculators to buy stock

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Wall 2 - The Banking System

• Problem 2 (continued) -
• Consider the scenario somewhere in the country,
  there is a bank panic. Runs on the bank occur.
  These banks send for their reserves to give to
  their depositors. NYC banks call in their loans.
  What happens next? A wave of selling stocks
• This would cause even more panic

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Creation of the Federal Reserve

• Solution to problems 1 2
• Create the Federal Reserve System which divided
  the country into 12 districts, each with a
  Federal Reserve Bank owned by the member banks.
• These banks are the bankers bank they do not
  deal with individuals, but lend money to member
  banks in need
• They also expand or contract the money supply.

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Wall 3 - Regulating Business

• Clayton Anti-Trust Act
• Prohibited one company from taking over the stock
  of another company IF that would create a
  monopoly
• Forbid anyone from serving on Board of Directors
  of 2 or more corporations IF that lessened
  competition
• Federal Trade Commission Act
• Set up the Federal Trade Commission
• If FTC found business practices restraining
  trade, it ordered cease desist order
• If company continued, they were punished

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Republican Presidents of the 1920s

• Warren G. Hardings Economic Policies
• 1921 - Budget Accounting Act creates the budget
  process putting all requests for spending and
  taxes into one budget.
• 1921 - Emergency Tariff Act raised duties on 28
  farm products
• 1922 - Fordney-McCumber Act raised tariff to an
  average of 38.5. Europeans could not sell their
  goods here and so could not repay their WWI
  loans. Europe responded by raising their tariffs
  on US goods. Trade decreases!

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Hardings Economic Policies (continued)

• Secretary of Treasury Andrew Mellon proposed that
  Congress cut taxes. Congress agreed and cut
  taxes
• In 1921 Congress repealed the excess profits tax,
  gift tax, reduced excise tax and estate taxes.
  It reduced top income tax rate for rich from 65
  to 50by 1924, the top rate was cut to 25.
• Example 1921, person earning 1 million paid
  663k in taxes, by 1926, only 200k.

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President Calvin Coolidge, 1923-1928

• Coolidge The business of America is business,
  the man that builds a factory builds a temple,
  the best government is the government that
  governs least, If the federal government were
  to go out of existence, the common run of people
  would not detect the difference for a
  considerable length of time

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Coolidges Economic Policies

• The FTC FRB was put in charge of people who
  would help those that they were supposed to
  regulate
• Secretary of Commerce Herbert Hoover encouraged
  businesses to share info on products and markets.
• Hoover wished to help businesses cooperate

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Coolidges policies (cont)

• Rulings of the U. S. Supreme Court
• United States Steel was NOT a monopoly despite
  controlling 40 of the entire steel industry
• With the green light from the Court, mergers
  took place. By 1929, 1,289 firms produced 3/4 of
  all goods turned out by corporations
• In a many industries a few big firms set prices
  through trade associations the Supreme Court
  ruled that they were NOT restraining trade

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Coolidges policies (cont)

• Farmers problems
• Enjoyed bumper crop harvests, but suffered from
  low prices
• in 1927 1928, Congress passes bill for the
  government to buy farmers surpluses
• Coolidge vetoed it Farmers have never made much
  money. I dont believe we can do much about it.