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Modern Economy 1919-1930. Significant developments Increase in the size and functions of government Result of populist movement is increase in regulation.

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Presentation on theme: "Modern Economy 1919-1930. Significant developments Increase in the size and functions of government Result of populist movement is increase in regulation."— Presentation transcript:

1 Modern Economy

2 Significant developments Increase in the size and functions of government Result of populist movement is increase in regulation – Antitrust – Regulation of natural monopolies Grain elevators Railroads, ICC Electricity and Gas

3 Income tax is established in 1913 Increase government regulation and spending during WWI – Wage and price controls – Changes do not last long. US enters WWI late in response to German Uboat attack on merchant shipping In spite of participation in WWI foreign policy is still isolationist

4 Economic Growth Some controversy about growth rate of real GDP during WWI – Christina Romer’s estimates suggest less growth than official statistics Real GDP grows 4.7% per year between , unemployment is 4% – Recession 1920/21 Almost half the world’s industrial output between 1925 and 1929 was produced in the US

5 yearReal GDPGDP deflatorPer capita GDP 1920$ $6, $ $6, $ $6, $ $7, $ $7, $ $7, $ $7, $ $7, $ $7, $ $8,016

6 Federal Reserve Policy What was it? Not clear that it was to increase economic growth Federal Reserve Act 1913 gave Fed control of reserve rates and rediscount rates – rediscount rate is what the Fed will pay to by a banknote due in the future now – Fed could originally only loan to banks by buying short term loans

7 Federal Reserve Policy Real Bills doctrine – So long as money is only issued for assets of sufficient value (Short Term paper), the money will maintain its value no matter how much is issued. – Financial crisis caused by too little legal tender – Will not happen if Fed buys up all short term bank loans offered at set rates

8 Federal Reserve Policy Fed increases the discount rate in 1920 Possible shift in 1924 to idea the Fed should use open market operations to stimulate economy in rescession Not only were its goals unclear, Fed had limited information – No gdp estimates – No unemployment statistics

9 Income distribution is more unequal – 1922 top 1% have 13.4 % of income – 1929 top 1 % have 14.5% of income Boom in building sectors – Value of new construction goes up from 6.7 billion in 1920, 12.1 billion in 1925, 10.1 billion in 1929 – Evidence of oversupply by mid 20s

10 Automobiles and other consumer durables are booming, table shows percent of families with Electric lights Inside plumbing Washing machines Car < <

11 Automobile Industry In cars were produced Increase in ownership caused by decrease in price – Henry Ford’s use of assembly line – Price of a Ford car fell 80% from

12 Consumer Credit Along with increase in consumer durables, there is an increase in consumer credit

13 Farm sector is depressed Farm price increased during WWI, then fell Between , farm income dropped by 21% Increase in costs, interest rates, taxes – Taxes per acre increased 40% Farm output as a % of GDP went from 18% to 12.4%

14 Financial Sector Stock prices increased throughout this period

15 President Hoover and members of Federal Reserve felt stock price increase was a bubble Common to buy stocks on margin – Banks are loaning money to investors based on assumption that prices will go up

16 Fed sent letter on February 2, 1929 to Federal Reserve banks. : The board has no disposition to assume authority to interfere with the loan practices of member banks so long as they do not involve the Federal reserve banks. It has, however, a grave responsibility whenever there is evidence that member banks are maintaining speculative security loans with the aid of Federal reserve credit. When such is the case the Federal reserve bank becomes either a contributing or a sustaining factor in the current volume of speculative security credit. This is not in harmony with the intent of the Federal Reserve Act, nor is it conducive to the wholesome operation of the banking and credit system of the country. (Board of Governors of the Federal Reserve 1929: 93–94, quoted from Cecchetti, 1998)

17 Fed Actions Very deflationary policy – Raises discount rate from 3 to 5 percent – Sells large quantity of securities


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