Hard Times - The Great Depression.

The Great Depression was the worst and deepest  peacetime economic shock in the history of the industrialized world. It changed how economists  thought about financial systems – giving birth to macroeconomics as a distinct field of study.  It brought about profound social change around the world and was a significant factor in  the drift towards the Second World War.

The depth of suffering during the Depression  years is hard for many of us to imagine today. According to a 1932 study by the New York City  Health Department, more than 1 in five children in the city were suffering from malnutrition,  and the Great Depression was only getting going at that point, it lasted seven more years. It’s easy to look at the great crash of 1929 as the start of the depression – It  is convenient to start with a dramatic and well-known event and claim that it both  started and caused everything that followed, but of course the real world is a bit more  complicated than that.

Ben Bernanke – a scholar of the great depression - famously said that "To  understand the Great Depression is the Holy Grail of macroeconomics. " To this day economists  and historians disagree about the cause of both the crash and the depression that followed,  but the roots of these problems can be traced to the events at the end of the First World War. When Germany signed the armistice in 1918 ending hostilities, its leaders at first thought that  they were accepting a “peace without victory,” as was outlined by Woodrow Wilson in his famous  Fourteen Points.

By the time the allied leaders and representatives from Germany gathered in  the hall of mirrors in Versailles to sign the final treaty, the mood had changed significantly,  Germany had been denied a seat at the negotiation table and the blame for inciting the war  was placed squarely on its shoulders. It was forced to accept responsibility for the  losses and damages suffered by the allied nations and to pay several billion in reparations  to rebuild the destroyed economies of Europe. Before the First World War, Europe had been  the center of global power, with empires that stretched across the planet, and it had been  easy for goods and people to cross international borders.

When war broke out, capital – instead  of being used for growth was being spent on destruction, over the five-year period, the great  empires were severely diminished with some being essentially wiped out. International trade, which  had only grown in the past, was now shrinking. The destruction that had occurred in Europe  transferred financial power to New York as Europe had to turn to American banks for loans to rebuild  their infrastructure and repay their debts.

The reparations and war debts fueled  international tension and weakened not just the domestic economies of some European  nations, but also the international economic structure. European countries were now debtors  to, rather than creditors of, the United States. The First World War had brought unprecedented  prosperity to American farmers, as with Europe unable to grow crops, the demand for American  agricultural exports exploded, leading to rising crop prices and rising incomes.

American farmers expanded production to meet this demand by moving onto marginal  farmland and buying machinery like tractors, plows and threshers. The debt of American  farmers grew over this period as they borrowed to invest in both land and machinery. When the war ended, agricultural production in Europe recovered faster than many expected, and  Europe no longer needed to buy Americas surplus farm production.

This led to a short depression  in 1920 when American farm prices collapsed, and the Consumer Price Index fell by 11. 3%. Despite this downturn at the start of the decade Americas economy was growing healthily  in the 1920’s The war had brought new inventions and innovations in mass production.

When people today think of the 1920’s today, certain images come to mind, speakeasys, flappers,  the Charleston, bathtub gin, Deusenberg and Auburn cars. The 20’s have been described as an era  when America withdrew from the world and went into an orgy of self-indulgence. The decade  has been given many names like the Jazz Age, the Prosperity Decade, the New Era, the Era of  Excess, the Ballyhoo Years, and the Dr Decade.

The good times all unfortunately ended with  the 1929 crash, not just in the United States but all over the world. So, why did events  on Wall Street reverberate around the world, why did the depression last so long, and  how did America and the rest of the world eventually dig itself out of the financial hole? Before we dig into that let me tell you about this week’s Video Sponsor – Ekster who make  high quality wallets, bags, cases and other accessories.

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Worker productivity soared by 63 percent. Henry Ford had perfected his assembly  line to the point where a new Model T was being built every 10 seconds. Airplanes in the 1920s  were becoming more widely used for commercial purposes, and the decade is known as the Golden  Age of Aviation.

By 1929 there was one car to every five Americans, and a third of American  homes had a radio. This new invention, which would have sounded like magic a decade earlier, was now  being seen as essential. From a tiny base in 1922, sales of radios had increased by 1400 percent  by 1929.

There was a similar, if not quite so spectacular, explosion in the sales of household  appliances like vacuum cleaners, electric irons, refrigerators, and washing machines. All of  these new industries explained the economic boom of the decade. The way people spent their  leisure time was changing too - recreational activities like traveling, going to the movies,  and professional sports became major businesses.

If the economy was to keep growing, someone  (of course) had to buy all of these products and a culture of consumerism grew as more goods  reached more people than ever before. Despite the booming economy, many bought the new goods  on credit, leading to a significant increase in household debt by the end of the decade. There was a mild recession in 1924 and another in 1927 which is blamed on Ford  closing all of its production lines for six months to retool for the new model A. 

That gives you an idea of how important the automobile industry was at the time. Not everyone shared in the benefits of Americas rapid industrialization. In 1810, 81  percent of Americans had worked in agriculture, by 1920 agricultural employment had declined to  22% as farming became more mechanized and people moved to the cities to work in factories. 

In 1920, the farmers that made up 22% of the population received 15 percent of the  national income. Eight years later – in 1928, farm families accounted for just 9 percent of  national income as the price of farm produce was falling. By 1929 the annual income of a farm  worker was 36% of what was being earned by the average American.

While farm workers suffered  heavily during the great depression – it’s worth remembering that they had been suffering in the  decade leading up to the great depression too. It's argued that the Great Depression had roots  in a number of global economic dislocations that arose when European agricultural production  came back online after the First World War. The chronic overproduction of agricultural  produce both in Europe and The United States drove produce prices down making it even harder  for countries with large external war debts like Germany to earn the hard currency they needed  to make interest payments to their foreign creditors.

Overproduction – from the perspective  of farmers doesn’t mean producing more food than the planet can eat – there was a severe famine in  Russia in the early twenties. Overproduction from a farmer’s perspective just means producing  more food that there was a paying market for. Farmers difficulties were compounded by the  rise of the automobile in the 20’s as cars replaced the demand for beasts of burden – that  farmers had bred and provided to the country.

The First World War had also increased the  power of organized labor in Europe – much more so than in the United States - this made  it difficult for European employers to cut wages when deflation was boosting the real  income of workers and wiping out the profit margins of employers. European businesses were  forced – at the time - to choose between worker layoffs or bankruptcy, and they chose layoffs. While the cultural memory of the 1920’s and 30’s is of a great economic boom in the 20’s followed  by a depression in the 30’s, that is a very US centered view of history.

In Britain, the economic  experience was reversed. The 1920s were hard years for the British economy, particularly in  industrial regions, which were plagued by high unemployment, weak growth and deflation.  The British economy started its recovery in 1931 when it came off the gold standard – and the  pound was allowed to fall to its natural level.

So why was Europe so different to the United  States? Well, World War I had destroyed the economies of Europe and left the European  powers heavily indebted. The US had displaced the UK as the world’s banker and Britain was  struggling to repay its wartime debts while trying to restore the British pound to its  former role as the worlds reserve currency.

In 1925, Winston Churchill – the British  Chancellor of The Exchequer at the time – made his first significant policy initiative to  restore the gold standard after the country had suspended convertibility nine years earlier  so that it could freely finance its war effort. The Bank of England were pushing  this idea, which Churchill initially opposed. He consulted a number of economists  (always a mistake) who endorsed the change and so, in his first budget, he controversially  announced the return to the gold standard at its prewar exchange rate of £4.

25 to the ounce, the  rate that had been set by Isaac Newton – when he had been Master of the Royal Mint in 1717. The British Pound had fallen to as low as $3. 40 cents in gold-based Dollars in 1920, and  while it was rising back to its old value – it was still about ten percent overvalued at that  price.

John Maynard Keynes wrote to Churchill at the time explaining the consequences of this  decision. It meant that, British exports would be too expensive and imports too cheap. This  would harm British businesses and workers.

During this period – due to physical gold  shortages most nations, other than the United States had stopped domestic circulation  of gold and held their international reserves in the form of either U. S. dollars or British  pounds.

International transactions used dollars or pounds – and sometimes French Francs – all  of which were pegged to gold at fixed exchange rates. The overvaluation of the pound and the  undervaluation of the franc at the same time caused all sorts of problems. The British trade  deficit led to a capital outflow, higher interest rates, and a weak economy.

The French trade  surplus led to the importation of gold that the French government didn’t allow to circulate  so that it wouldn’t expand the money supply. The international monetary arrangements  of the twenties were destabilizing because they were not allowed to operate as a price  mechanism promoting equilibrating adjustments. Gold convertibility had historically  constrained trade in important ways, as trade imbalances were limited by the ability  of a country to maintain convertibility into gold.

Large trade imbalances – like exporting too much  or importing too much threatened convertibility, as each country’s promise to exchange currency for  gold became less credible when foreign holdings of the country’s currency rose relative  to its central bank’s gold reserves. This system – despite its many problems – did keep  global trade broadly balanced. Countries that exported more than they imported would experience  an inflow in gold, raising the supply of money, which would spark inflation; in response, exports  from that country would decrease and imports would increase, as foreign products became more  competitively priced.

The opposite would occur when countries imported more than they exported  as the outflow of gold would cause deflation, making goods more attractive for export. Because  of this mechanism, demand contraction in deficit countries was always matched by demand expansion  in surplus countries – everything balanced out. This system changed in the wake of the first  world war as there were massive reconstruction costs which the victors had imposed on Germany.

Germany made its first reparations payment in 1921 but after that, paid little in cash and fell  behind in its deliveries of commodities like coal and timber. When Germany defaulted in 1923,  French and Belgian troops occupied the Ruhr. Germany responded with passive resistance to the  occupation and the government printed money to pay the idled workers, which fueled the hyperinflation  which was destroying the German economy.

The Dawes Plan of 1924 was set in place to  ease the problem. Under the plan Americans lent money to Germany to pay reparations to the  European Allies, who in turn made debt payments to the United States. This arrangement kicked off  American foreign lending on a massive scale.

The US was running a large trade Surplus at the  time – exporting much more than they imported – not unlike what China does today. Finished goods  left the country and gold came in and America could afford to lend money abroad. This lending  financed foreign purchases of American goods.

American foreign lending hit $900 million  dollars in 1924 and $1. 25 billion in both 1927 and 1928. This financing of foreign  purchases of American goods helped the unbalanced US economy – where more goods  were being produced than could be consumed domestically - avoid collapse for a few years, but  ultimately it made the Crash worse when it came.

The British had fulfilled the role as the  worlds banker before the first world war and British lending in the 1800s had generally  been countercyclical. When times were good at home domestic investment opportunities drew  British capital away from international loans, but during slumps in the domestic economy the  British expanded foreign lending. This ebb and flow had a globally stabilizing influence. 

American foreign lending in the twenties and early thirties, followed an opposite pattern. In the late 1920’s the US was a huge exporter, but the American farmer was still suffering  as overproduction had continued to depress the prices of agricultural goods.  In the lead up to the 1928 election, Senators Smoot and Hawley put forth the idea that  raising tariffs on imports would alleviate the overproduction issue.

Now while there had been  an increase in imports of manufactured goods, manufactured exports were rising even faster.  Food exports had been falling, but the value of food imports from abroad was actually quite small.  Overall – the United States was a huge exporter, and these tariffs made no sense whatsoever.

Herbert Hoover – who was running for election in 1928 pledged that as part of his program to  help farmers, he would seek higher duties on agricultural imports, and once elected, he called  a special session of Congress for the purpose of “selective revision” of the tariffs. Public discussions about the tariffs centered on helping the American farmer  and “equalizing” production costs at home and abroad. These arguments couldn’t have been  more wrong as once trade partners retaliated, farmers ended up losing more from increased costs  on items they import than they gained from price increases for their products, most of which  faced almost no foreign competition anyhow.

An American Farm Bureau Federation study  indicated that American farmers would gain $30 million from the increases in agricultural  tariffs and lose $330 million in increased costs. Hoovers special session dragged on and the House  of Representatives eventually passed the act in May 1929. If the United States wasn’t going  to buy goods from other countries, there was no way for other countries to earn dollars  to buy from Americans, and more importantly no way to earn dollars to meet the interest  payments on American loans.

By September 1929, Hoover's administration had received protest notes  from 23 trading partners. Some countries just protested while others also retaliated with trade  restrictions and tariffs of their own. American exports to the protesting nations fell 18% and  exports to those who retaliated fell by 31%.

Many scholars have argued that while the  Smoot-Hawley tariff had disastrous economic effects - that it can’t be blamed for the  stock market collapse of October 1929, since it wasn’t signed into law until  the following June. Others argue that investors were aware that the tariffs  were in the pipeline and would have tried to anticipate the likelihood of the act  passing and its expected economic effects. If investors did anticipate the effects of the  tariffs and sold their stocks – they may have been wise to do so as exports fell from $7 billion  dollars in 1929 to $2.

5 billion dollars by 1932; federal spending was only $2. 6 billion in  1929 and reached $3. 2 billion in 1932.

The tariffs didn’t exactly help American farmers  either. Trade accounted for 17 percent of farm income before the tariffs and farm exports were  slashed to a third of their 1929 level by 1933. On the eve of the crash, the United States was  actually in good economic shape.

There was no shortage of productivity enhancing technological  innovation, which meant that the same amount of labor now produced significantly more goods.  Businesses like Ford were doing well and were able to pay their workers well. America was  applying science and invention to industry like never before and even management  practices were being revolutionized by men like Alfred Sloan at General Motors RCA, which was the hottest tech stock of the 1920s rose by 940 percent between 1925 and  1929.

Its PE ratio at the peak was 73 – which is high – but we’ve also seen higher –  and for slower growing companies. The stock bubble encouraged a rush of new IPO's.  It’s not true that everyone was speculating madly in 1929.

Just three percent of Americans  owned any stock at the time, and only around 1% owned enough stock to keep an account with a  broker – the majority only owned a few shares. The Great Depression can’t be simply blamed on  the bursting of a stock bubble or the imposition of tariffs. Real life is (of course) a  bit more complicated than that.

By 1920, The United States held around 40% of the world’s  monetary gold. France had been accumulating gold too and its share of the world’s gold supply rose  from 9 percent in 1927 to 17 percent by 1929 and reached 22 percent in 1931. Before the crash - in  1928 - the US Fed was worried about its loss of gold and also about the ongoing boom in the stock  market and so it hiked interest rates to stop the outflows.

As the US and France accumulated  more and more of the world’s monetary gold, other central banks took measures to stem  the outflow of gold too. In country after country these deflationary strategies began  contracting economic activity and by 1928 some countries in Europe, Asia, and South America  had fallen into recession due to a shortage of money. More countries’ economies began to  decline in 1929, including the United States, and by 1930 a depression was in force for  almost all of the world’s market economies.

Contrary to popular beliefs, the 29 crash was  not a two-day event, instead it was a long rolling downward slide that went on for weeks  from September the third through until November thirteenth. There were brief upsurges after some  of the worst days – but down and down it went. A week before Black Thursday, Irving Fisher, an  economics professor at Yale announced that U.

S. stock prices had reached a permanently high  plateau – given the growth in productivity and technology it was reasonable for earnings  to only trend higher. The stock market had unfortunately been slipping for over a month  at that point, and on “Black Monday” dove 13% in a day falling a further 12% the next day.

Over  the next three years the US stock market declined almost 90% reaching its low in July 1932. The  market didn’t return to its prior peak until November 1954 – over twenty-five years later. This collapse - if it didn't actually cause - it coincided with – the start of the worst economic  shock in the history of the industrialized world.

In the United States, economic output collapsed  by a third, unemployment reached 25%, or closer to thirty three percent if a modern definition  of unemployment was used. The depression was a global catastrophe that saw prices and output  decline in almost every economy in the world. Only Germany saw as severe an economic decline as  in America.

International trade shrunk by 2/3 as countries tried to hide behind tariffs and import  quotas to defend their internal economies. The Soviet Union with its planned economy was the  only country that appeared to be unaffected. The deflation that took place in the first  three years of the Great Depression was the most dramatic deflation that the U.

S. has ever  experienced. Prices dropped an average of 7% per year between 1930 and 1933.

Deflation led to  business bankruptcies, bank-runs and rising rates of unemployment. Between the summer of 1929 and  early 1933, the wholesale price index fell 33% President Hoover – in trying to boost American  spirits after the crash told journalists that “the fundamental business of the country, that is  the production and distribution of commodities, is on a sound and prosperous basis. ” A year later  in 1930 he told Americans that prosperity was just around the corner – and he likely believed it  at the time, as recessions and depressions had always come and gone within a year or two.

Other  than during the First World War, business activity had fallen in only seven of the last 60 years  and the only two-year setback had been 1907 to 1908. Historically, the average annual decline  in real GDP during a slowdown was 1. 6 percent and the worst decline had been 5 1/2 percent.

This time around it was a lot worse - production fell 9. 3% in 1930 and a further 8. 6% in 1931.

At  the very bottom in June 1932 GDP was 55% below its 1929 peak so roughly ten times worse than  the worst example that had been seen up until that point – and rather than lasting one or  two years, the downturn would last a decade. Even during the boom of the 1920’s American  economic growth had been below its long-term growth trend starting in 1870 when the United  States was in its hyper growth phase. A number of recessions and depressions had hit the  United States during that prior period of growth, but the historian Robert McElvaine in his  excellent book “The Great Depression” notes that each slowdown over that period had hit harder  than the prior one.

He argues that as the United States became less agrarian and more industrial,  less rural and more urban, an ever-increasing percentage of the population became susceptible  to the vagaries of the market economy. In the less industrial era, Americans had (of course)  been victims of economic collapse – but they had been mostly able to feed themselves and  their families during hard times – as they were mostly farmers. By the 1930’s Americans  were more dependent on wages as the nation had industrialized.

Urban working-class people who  rented their homes and worked in factories found themselves in desperate straits when they lost  their jobs and couldn’t find new ones – and over time there were more and more of these people  – and the population was sensitive to economic conditions – rather than growing conditions. Herbert Hoover is often accused of doing nothing for the people in the early days of the  depression, but that is not really fair to say. He spent heavily on public works, schools,  roads and hospitals – and in fact engaged in more peacetime spending than any president had  done before him, but it simply wasn’t enough.

The international part of the crisis began in 1931  when the Creditanstalt bank of Vienna collapsed, starting a domino effect that spread to the  rest of Europe. The reason this collapse was so impactful is that it was not just the  largest bank in Austria, but it was larger than all of the other Austrian banks combined.  It had strong ties to the rest of Europe and its collapse led to a Europe-wide crisis.

The  runs on gold in Europe led Britian to leave the gold standard in 1931 and devalue the pound. Leaving the gold standard was a politically controversial move at the time. It was  by no means a cure-all, but overall, devaluation helped Britain to become more  competitive and the 1930s proved a far less painful period for the UK than they were  for most other major economies at the time.

A more competitive British pound allowed for  a strong British recovery and significantly greater middle-class prosperity. While on the  gold standard Britain had been forced to slash spending and – and raise taxes – which were  not exactly flowing in due to the depressed business environment and high unemployment. While things were now improving in the UK, they were only getting worse in the United  States.

Technological improvements in the 1920’s like mechanized plowing and harvesting  had made it possible to operate larger farms in the United States without higher labor  costs. With insufficient understanding of the ecology of the great plains, farmers had been  plowing the virgin topsoil displacing the native, deep-rooted grasses that normally trapped soil and  moisture even during periods of drought and high winds. The plains entered an unusually dry era  in the summer of 1930 and over the next decade the northern plains suffered four of their seven  driest calendar years in recorded history.

The dry weather caused crops to fail, leaving the plowed  fields exposed to wind erosion. The soil eroded and was carried east by strong continental winds. This catastrophe intensified the economic impact of the Great Depression in the region,  and farming families who had already been suffering for a decade were forced to abandon  their farms and migrate to other parts of the country seeking work.

This catastrophe led to  widespread hunger, homelessness and poverty. Over the decade of the Great Depression about  three and a half million people migrated as dust bowl refugees out of the Plains states. Robert McElvaine writes in his book on the depression that history is usually viewed from the  top, or through the eyes of elites, by examining the activities of governments and intellectuals,  but the Great Depression he argues needs to be examined through the eyes of the ordinary person  to understand how it caused a fundamental shift in the values of the American people.

Older Americans will remember how their parents or grandparents who lived through these  times scrimped and saved even when times were good and were careful not to waste anything  in case hard times were to come again. McElvaine writes that the initial reaction to the  Depression by its many victims was bewilderment, defeat, and self-blame. People who had taken  credit for the success that they had enjoyed in the twenties felt that they had little choice but  to accept responsibility for the their unfortunate circumstances in the thirties - as they tried to  understand the calamity that had befallen them.

Conditions were particularly bad for farmers, who  were now in the second decade of their depression. By 1932 a bushel of wheat would fetch only ten  percent of what it had brought twelve years earlier. The farmer now had to deal not only with  low prices for his products, but also with general deflation.

Farmers, crushed by long-term  debt, were threatened with foreclosure. “Penny auctions” were one example of how  bankrupt farmers stuck together. Neighbors of a bankrupt farmer would prevent—by  threat of force if necessary—realistic bids to buy a foreclosed farm they would  then buy it back for a nominal fee (often one dollar) to return it to its original owner.

Workers lined up hopelessly outside factories looking for work, knowing full well that  none was available. Hard working Americans used to supporting themselves and their  families felt great shame lining up in breadlines and at soup kitchens. In rural areas hungry people sometimes turned to eating weeds, urban dwellers  turned to rooting through garbage cans and city dumps for food.

A Chicago widow reported that she  would remove her eyeglasses before eating spoiled meat as the sight of it was so revolting. Records of the time describe how the lack of money, work, and self-esteem caused  problems at home too, as when a father’s dignity was based on his occupation and his  role as provider, the loss of his job meant a decline in his status within the family. People often withdrew socially to hide the shame of being out of work – not realizing how many  of their friends were in the same situation.

Men over the age of forty became unemployable –  they would often spend their last few pennies on a secondhand suit of clothes so that they would  look decent when applying for jobs. They began to look and feel older than they actually were – the  lack of nutrition left them underweight and their shabby clothes with frayed collars, worn shoes and  missing teeth added decades to their appearance. Women lost proportionately fewer jobs than men  during the great depression as the type of work they did – at the time - was more personal in  nature.

School teachers, domestic servants, and clerical workers were more valued by  their employers as individuals – and they weren’t considered interchangeable like factory  workers and farm hands were. When The New Deal was introduced – even more roles – which were  considered women’s work – like social work and clerical work were created than had existed before  the depression. Additionally, because women earned less than men, they were cheaper to keep on during  hard times.

A 1940 study found that in the five most depressed sectors, women represented only  2 percent of the workforce. In stark contrast, women held 30% of the jobs in the industries  which experienced the least layoffs. Employment discrimination, both in terms of what constituted  a “female” job, as well as the wage gap, kept more women in steady work than men.

Racial minorities fared the worst during the depression – often being the first to  be laid off and the last to be hired. I should mention that many today only see the  bleakness of the great depression – and it was a bleak time – but this is partially due to  the stark black and white photographs that remain to this day. The novelist Josephine  Herbst writes that there was also “an almost universal liveliness that countervailed universal  suffering.

” The home – she says - became a center of leisure activity, with an evening by the radio  or reading aloud from books which provided a cheap form of family entertainment. She went on to  say that “Talking was the Great Depression pastime. Unlike the movies, talk was free.

” By the election of 1932, the American voter had had enough with Herbert Hoover who  they blamed for the economic downturn. Franklin D. Roosevelt aligned himself with the  growing public hostility to bankers and greedy businessmen and swept to power in 1933 when  his party won its biggest advantage in the Senate and the house since the Civil War.

Even in the prosperous twenties nearly 7000 American banks had failed. Most of these had  been small “country” banks and their failures had been hardly noticed. In 1930 the situation got  a lot worse.

There were 1345 failures that year, including a large bank - The Bank of the United  States in New York. More than two thousand banks failed in 1931 and depositors of the time were  unable to distinguish good banks from bad. As his first act in office FDR declared  a nationwide bank holiday – where banks were closed until examiners could  decide if they were good or not.

He submitted to Congress an Emergency Banking  bill drawn up largely by bankers - and both houses passed the bill without debate. A  rolled-up newspaper was used to symbolize the proposed legislation until the still-wet  copies of the bill arrived. Roosevelt signed it into law eight hours after its introduction  in Congress.

The act provided assistance to private bankers and gave them a government  stamp of approval. It created the FDIC, which began insuring bank accounts at no cost for  deposits of up to $2,500 dollars per customer. The act additionally gave the president executive  power to operate independently of the Federal Reserve during times of financial crisis.

In  1933 Roosevelt abandoned the gold standard, delinking the value of the dollar to gold – which  caused the dollar to fall 11. 5% - in 1934 he relinked it at a lower gold content than before. Roosevelt was elected for four consecutive terms (While there was a tradition of only serving two  terms, there were no presidential term limits in law at the time) Roosevelt’s first 100 Days in  office saw an unprecedented amount of legislation being passed.

He established a number of agencies  and measures designed to provide relief for the unemployed and to end the depression. The  Federal Emergency Relief Administration, distributed relief to state governments.  The Public Works Administration oversaw the construction of large-scale public works  like dams, bridges, and schools.

The Rural Electrification Administration brought electricity  to rural homes and the Civilian Conservation Corps hired 250,000 unemployed men for rural projects. FDR expanded Hoover's Reconstruction Finance Corporation, which financed railroads and  industry, he gave the Federal Trade Comission broad regulatory powers and provided mortgage  relief to millions of farmers and homeowners. Roosevelt passed two securities acts – one in 1933  and another in 1934 – establishing the SEC and the securities regulations that we have today.

He set  up the Agricultural Adjustment Administration to increase commodity prices, by paying farmers  to leave land uncultivated and cut herds. This was possibly his most controversial act  as in order to drive up agricultural commodity prices he ordered the slaughter of over six  million pigs, the plowing under of 10 million acres of crops – all at a time when Americans  were struggling to feed themselves – there had been thirty deaths from starvation in America  in the very year when all of this food was being ordered to be spoiled. The Agricultural  Adjustment Administration concept of limiting agricultural production was no better in a country  when people were unable to feed their children, and agricultural workers couldn’t find work.

Roosevelt tried to cut the federal budget too. This included a reduction in military spending  and a 40% cut in spending on veterans’ benefits. Half a million veterans and widows were removed  from the pension rolls, and benefits were reduced for the remainder.

Federal salaries were cut  and spending on research and education was reduced too. The veterans were well organized,  protested and won the right to transform their benefits from payments due in nine years’  time to immediate cash – this change pumped enough money into the consumer economy  to have a major stimulus effect in 1936. In his second term Roosevelt introduced the  minimum wage and Social Security.

While social security will have helped reduce elder poverty  eventually – it was quite a flawed piece of legislation as it excluded the neediest workers  (farm and domestic workers) and it worked as a form of payroll tax – taking spending money out of  the economy where it was needed. Workers – badly in need of spending money - had to start paying  in to social security right away – and no future payments were scheduled until 1941. The most important part of the second new deal was the Works Progress Administration, which  divided $5 billion dollars among several different agencies to create work for the unemployed.

There were problems with the WPA, the pay was very low, amounting to half of the subsistence  wage at the time. The reason for the low wages was that firstly there was not enough money to go  around, but also because Roosevelt wanted to be sure that work relief was not attractive  in comparison with private employment, so wages were kept low, and the projects  taken on were mostly unimportant – as it was designed to not compete with private businesses. The Public Works Commission on the other hand was seen as a means of bringing about recovery, by  also providing valuable public infrastructure to the American people.

The PWC was headed by  Harold Ickes who refused to spend for the sake of spending, so much of the money was spent  on materials, engineers, and skilled workers. Private contractors often did the work. The agency  was efficiently run and left public structures like bridges dams, schools, municipal buildings,  sewage systems, port facilities, and hospitals.

The clear purpose of PWC projects and the careful  spending kept it above much of the criticism that was leveled at other New Deal programs. Scarcely anyone in government at the time (including Roosevelt) liked the idea of the  dole. It was believed that direct relief payments stripped people of their sense of independence  and their sense of individual destiny.

Roosevelt who spoke directly to the American  people on the radio in his fireside chats (the first time an American president was  able to communicate directly with voters) received masses of mail from the public –  which were a treasure trove of information for historians trying to understand the times.  Americans wrote to the president asking for work rather than a dole. Robert McElvaine provides  excerpts from these letters in his book.

“My pride took an awful beating when I had to  apply for relief,” a Minneapolis man wrote, “but I feel different about the WPA. Here  I am working for what I’m getting. ” A woman wrote in saying “It means that I can  look people in the eye because I’m not on the dole” Another man wrote that the work allowed  him to sleep nights instead of lying awake thinking of desperate things he might do.

Roosevelt won his third term in 1940 winning 55% of the popular vote. There was  a strong class division in the vote, and a survey conducted after the election found  that 80 percent of those on relief had voted for Roosevelt, as had 60 percent of those who  said that they wouldn’t get by without relief for one month if they lost their jobs. The unemployment rate in 1940 was still at 14.

6 percent, and even in 1941 as the defense  industries moved into high gear exporting arms to Europe, the mean unemployment rate was still 9. 9  percent, representing almost six million Americans who wanted to work. Industrial production,  which had finally surpassed its 1929 level soared 30 percent above its 1929 level in 1941.

The Great Depression was a global phenomenon. - By the late 1930’s every country had replied to  economic difficulties by devaluing their currency and raising tariffs – all in an attempt to push  economic distress from their country to others. The failure to cooperate on economic  matters had set every country against its neighbors.

Economic failures had led to  political failures and extremist governments took power in many countries. When war kicked off in Europe, nations around the world moved gold to the  United States for safety, American banks filled with gold were now willing to lend again. Military spending boosted American exports and possibly saved the reputation of the New Deal and  the Roosevelt presidency.

Without the military boom, Roosevelt’s presidency might have  been remembered as compassionate and helpful but ineffective in solving the  fundamental problems of the Depression. Whether you owned a business, had  a job, invested, borrowed money or even just had a bank account in the 1930’s, the  depression found a way to hurt you financially. Globalization – and then the retreat from  globalization meant that the effects of The Great Depression were felt around the world. 

The economic effects hit Germany particularly hard leading to the rise of Hitler – who used the  despair of the German people as a rallying call. In the 1950s, Milton Friedman and Anna Schwartz  began compiling historical data on monetary variables. As they examined the data, they say  that it became obvious that the data was at odds with the standard Keynesian explanation for the  Great Depression.

In their 1963 book, A Monetary History of the United States, they presented  the evidence that led them to the conclusion that the Great Depression was not the necessary  and direct result of the stock-market crash of October 1929. Friedman and Schwartz argued  that the depression was brought about by the Fed’s failure to carry out its role as the  lender of last resort. Rather than providing liquidity through loans, they say that the  Fed just watched as banks dropped like flies, oblivious to the effect this would have on the  money supply.

They say that the Fed could have offset the decrease created by bank failures by  engaging in bond purchases, but it didn’t do so. They say that the Federal Reserve System  should have engaged in large-scale open market purchases of government bonds, providing  banks with additional cash to meet the demands of their depositors. This would have ended—or at  least sharply reduced—the stream of bank failures and would have prevented bank runs from reducing  the quantity of money.

Unfortunately, the Fed’s actions were hesitant and small. In the main, it  stood idly by and let the crisis take its course. In 2002 Ben Bernanke then a member of  the Federal Reserve Board of Governors publicly acknowledged that the Federal  Reserve’s mistakes contributed to the "worst economic disaster in American history.

" Michael Pettis – when writing about Chinese overproduction, compared it to American  overproduction in the 1920’s. He explained that the 1929 crash cut off funding for  countries who were buying US exports, If foreign countries could no longer absorb US  overcapacity, he argues that the US then needed to either increase domestic consumption or cut  back on domestic production. One way or another production and consumption needed to balance.

He says that there was - of course - more to the story than just a drop in foreign demand for  American goods and that with the collapse of parts of the domestic US banking system,  domestic private consumption also fell. He says that the slack in demand should  have been taken up by US fiscal expansion, but instead of expanding aggressively, both  Hoover and Roosevelt expanded cautiously. Since US production exceeded US consumption, the  need for demand creation, most logically resided in the US.

But the US had other ideas.  Rising unemployment pressures prompted US senators to respond with tariffs. With the Tariffs, Washington was trying to create additional domestic demand for  American goods by upping the prices of foreign made goods - forcing the brunt of the  adjustment onto trading partners – who of course retaliated causing international trade to  decline by nearly 70 per cent in three years.

Without global trade each country had to adjust  domestic supply to match domestic demand, but in such a situation – export driven economies (which  the United States was at the time – and China is today) are more vulnerable to a reduction in trade  than countries who mostly buy foreign goods are. If you found this video interesting,  you should watch my video on Jesse Livermore – one of the biggest traders of the  20’s and 30’s next. Don’t forget to check out our sponsor Ekster using the link in the video  description.

Talk to you again soon, bye.