Transcript Modern Economy 1900-29

Modern Economy
1919-1930
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
• 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
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 1921-1929,
unemployment is 4%
– Recession 1920/21
• Almost half the world’s industrial output between
1925 and 1929 was produced in the
US
year
Real GDP
GDP deflator
Per capita GDP
1920
$687.7
12.85
$6,460
1921
$671.9
10.95
$6,191
1922
$709.3
10.35
$6,445
1923
$802.6
10.64
$7,170
1924
$827.4
10.51
$7,251
1925
$846.8
10.70
$7,311
1926
$902.1
10.75
$7,684
1927
$910.8
10.49
$7,652
1928
$921.3
10.57
$7,645
1929
$977.0
10.61
$8,016
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
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
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
• 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
• Automobiles and other consumer durables are
booming, table shows percent of families with
Electric
lights
Inside
plumbing
Washing
machines
Car
1900
3
15
<1
<1
1910
15
<1
1
1920
35
20
8
26
1930
68
51
24
60
Automobile Industry
• In 1899 56 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 1909-1929
Consumer Credit
• Along with increase in consumer durables,
there is an increase in consumer credit
Farm sector is depressed
• Farm price increased during WWI, then fell
• Between 1920-1929, 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%
Financial Sector
• Stock prices increased throughout this period
1920
100
1921
105
1922
129
1923
125
1924
150
1925
183
1926
188
1927
240
1928
320
1929
276
1930
192
• 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
• 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)
Fed Actions
• Very deflationary policy
– Raises discount rate from 3 to 5 percent
– Sells large quantity of securities