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The paper for this course will not be graded so much for style as for content. I want you to pick a subject you have an
interest in learning about. I would suggest that you choice a person of importance because it is usually easier to study a
subject that has a human face to it. The paper should have a cover page that lists your course and sources; the Title page
comes next followed by the main paper. I expect it to be about five pages more or less. Please double space and use no
larger than 14-pt type. I do not have a particular form or style for you to follow for sources and you can paraphrase
without footnotes or headers. As I mentioned earlier I am interested in content not in grammar. The paper should be sent as a
Microsoft word attachment. Write me to discuss your choice of topic before you start to work.
PAPER TOPIC: Frederick Douglass
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This is a SAMPLE PAPER to show you the form for your
work.
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Name_________________________
Course________________________
Section________________________
Topic_________________________
Sources______________________
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5.
The Great Depression
By
Bill Russell
United States History II
His 2333 1877 to Present
3/23/1998
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The Great Depression: An Overview
Introduction
The Great Depression is probably one of the most misunderstood events in American
history. It is routinely cited as proof that unregulated capitalism is bad, and that only a
massive welfare state, huge amounts of economic regulation, and other interventions,
can save capitalism from itself. Among the many myths surrounding the Great
Depression are that Herbert Hoover was a laissez faire president and that FDR brought
us out of the depression. What caused the Great Depression? To get a handle on that,
it’s necessary to look at previous depressions and compare. The Great Depression was
by no means the first depression this country ever had, but it was clearly the worst.
What made it different than the rest? At the time of the Great Depression, government
intervention in the economy was higher than it had ever been and a special government
agency had been set up specifically to prevent depressions and their associated
problems, such as bank panics. This agency was the Federal Reserve Board and it was
to have been the loaner of last resorts for banks in order to prevent collapses as had
happened during earlier depressions. But as we’ll see, there is good reason to believe
that the FRB actions explain alot of the problems that lead up to the Stock market crash
and the subsequent depression.
Although there are many macroeconomics schools of thought, I’ll be concentrating on
two initially, Keynesian economics and Austrian School economics. Keynesian
economics got its start during the Great Depression with the publication in 1936 of The
General Theory of Employment, Interest, and Money, by John Maynard Keynes.
Austrian School economics began much earlier, most notably with the publication in
1871 of Carl Menger’s Principles of Economics. While the Austrian theory has never
been mainstream (Paul Krugman refers to it as the economic equivalent of the
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phlogiston theory), its adherents are some of the harshest critics of Keynesian
interventions, so it will serve as a good counterbalance until I can bone up on other
schools of thought.
Recessions, Depressions, and Business Cycles
The exact cause of business cycles is one of the biggest problems in economics. There
are several explanations. The current Keynesian model relies on what is referred to as
"sticky wages" (or "sticky prices") to explain why the cycles occur. Under these models,
wages or prices fail to reach their market clearing level. The Austrian School
explanation is that all business cycles are due to government intervention in the
economy. In particular, government efforts to manipulate the interest rate causes a
boom and bust cycle because people over-invest ("malinvestment") when interest rates
are low and when interest rates are raised to stave off the inevitable inflation, a bust is
caused due to the mismatching of consumer and business goods. There are six
depressions in American history that are thought to be the worst since detailed records
of economic data started to be kept (around 1867), 1873-79, 1893-97 (actually two
contractions separated by an incomplete expansion), 1907-08, 1920-21, 1929-33, and
1937-38. Although depressions vary on length and severity, the similarities are so
profound that Nobel Laureate Robert Lucas has stated, "business cycles are all alike."
Since it’s been about 60 years since we’ve had a depression, one might think that the
economy is being managed better than it used to be. It’s not clear why the economy is
being managed better. The Federal Reserve Board was created in 1913 and yet half of
the worst depressions happened after its creation. A better candidate might be the
adoption of Keynesian management techniques, which were not fully implemented until
after the last severe contraction in 1937. But there are some indicators that that is not
responsible either. Detailed studies have been done to compare post-war business
cycles with prior ones. At least one indicates that there was no improvement.
A key insight into the difficulties of managing the economy was made by Robert Lucas.
Looking at post-World War II business cycles, he argued that if one could choose
between smoothing out the cycles completely and increasing the annual economic
growth by 0.1%, the latter would make people better off overall. As we consider the
different policy options, it is important to keep this insight in mind as one more trade off
that has to be considered.
The Federal Reserve Board
The Federal Reserve Board was created in 1913. Ostensibly, it was to act as the lender
of last resort to prevent bank panics like the one that had occurred in 1907. Although
some conspiracy minded folks might weave elaborate tales regarding its creation, the
reason is rather straightforward. The big banks simply wanted government protection
and bailouts and were more than willing to endure a little government regulation in
return. Like the Interstate Commerce Commission before it, the Fed would be staffed
with people from the industry that it was supposedly a watchdog over and who would
most likely feel that what’ s good for banks is good for America. Throughout the years
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preceding the Stock Market crash, the Fed did just that. The Fed set below market
interest rates and low reserve requirements that all favored the big banks. The money
supply actual increased by about 60% during this time. The phrase "buying on margin"
entered the American vocabulary at this time as more and more Americans overextended themselves to take advantage of the soaring stock market. So what went
wrong? It was in 1929 that the Fed realized that it could not sustain its current policy.
When it started to raise interest rates, the whole house of cards collapsed. The Stock
Market crashed and the bank panics began. But what would make this depression
worse than all the rest? There was a depression in 1921, but no one remembers that
one. What was different? As we’ll see, there were a number of policies enacted over the
next few years that, from both a free market and a Keynesian perspective, would do
nothing to help America recover and do everything to exacerbate the depression. Over
the next few years, the Fed would allow the money supply to contract by a third. A free
market advocate’s response would be to do nothing and let the market work itself out.
Ideally, what would happen is that businesses would realize that no one was buying and
lower prices accordingly until people started buying again. The same thing would
happen with labor and capital. Prices would be lowered until they reached the market
clearing price and the economy would recover. Keynesians claim that some prices or
wages will be "sticky" and may take a long time to reach their market clearing price,
causing needless suffering along the way. The Keynesian prescription is two-fold. First,
the Fed should inflate the money supply. Keynes even whimsically suggested leaving
jars of money around where enterprising young boys could find them. However, this
may not work if the depression is severe enough to enter what is called a liquidity trap.
Under this scenario, no amount of running the treasury’s printing press will restore
order. In this case, the government should simply start spending money itself, thus
"priming the pump" so to speak. As we’ll see, Hoover (and later FDR) implemented a
mixture of policies, some of which were Keynesian (increased government spending)
and some of which were not (price supports and other attempts to keep prices and
wages high).
Herbert Hoover
Herbert Hoover has been accused of being a do-nothing president who allowed the
country to continue to slide into its worst depression ever. Some will grudgingly admit
that Hoover did take some action, but that it was too little, too late. But the truth is far
more complex. Hoover did intervene after the Stock Market crash, but the acts passed
by Congress and signed by Hoover were the worst kind of intervention: they actually
exacerbated the problem. The most famous of these interventions was the SmootHawley Tariff Act. Raising tariffs was one of the worst things that could be done.
Remember, both free market advocates and Keynesians agree that lowering prices
would cure a depression, it’s just that the Keynesians believe government intervention is
necessary. A tariff does exactly the wrong thing by raising prices. Thus Smoot-Hawley
was guaranteed to worsen any depression, not improve it. Other acts passed during
Hoover’s administration had similar effects of either raising prices or keeping them
artificially high when they should have been dropping. Thus, it’s not that Hoover was a
do-nothing president, it’s that he intervened in exactly the wrong way.
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FDR
Ironically, FDR, the president who implemented so many government programs himself,
was elected on a platform of a balanced budget and economic non-intervention. So
what did he do upon getting into office? He promptly expanded on Hoover’s programs.
Some of these programs, the ones that increased spending, would get approval from
Keynesians. Others, however, like the minimum wage and the Davis-Bacon Act,
suffered from the same problems that Hoover’s programs did: they reduced price
flexibility, often setting a minimum and thus continued to exacerbate the Great
Depression.
FDR’s policies seemed to work at first. The economy began to expand again in 1933
and continued to do so until 1937. At that point, a second depression began and lasted
until 1938.
World War II
The United States entered World War II in December of 1941, the year generally
considered to be the end of the Great Depression. Federal outlays skyrocketed as the
country geared up for war. This Keynesian-style boost to the economy seems to have
brought the depression to an end.
After the War
TBD