American Economy (1920s-1930s) PDF

# Case Study 11: The American Economy ## Introduction This case study analyzes the relationship between the federal government and the economy in the United States during the 1920s and 1930s. It outlines how ideas about state intervention in the economy changed over time and how these changes were...

# Case Study 11: The American Economy ## Introduction This case study analyzes the relationship between the federal government and the economy in the United States during the 1920s and 1930s. It outlines how ideas about state intervention in the economy changed over time and how these changes were reflected in government policy. After examining the causes of the stock market crash of 1929, the case study analyzes how President Franklin Delano Roosevelt responded to the Great Depression that followed and explains how the present limited welfare state and mixed economy of the United States grew out of Roosevelt's New Deal reforms. ## The American Economy ### United States at a Glance - Area: 9 372 610 km² - Population (1995): 263.8 million (world's third-largest country) - Life Expectancy in Years (1994): Males 72.6, Females 79.4 - GDP (1994): $6638.2 billion (U.S.) - GDP per Capita (1994): $24 300 (U.S.) - Doctors per 1000 People (1993): 2.38 - Hospital Beds per 1000 People (1993): 4.4 - Health Expenditures as Percentage of GDP (1990): 12.7 - Telephones per 1000 People (1994): 590 - Televisions per 1000 People (1992): 814 ## Learning Outcomes After reading this case study, you should be able to: - Explain the Republican economic policies from 1921 to 1929 - Understand the weaknesses in the economy in the 1920s and the causes of the 1929 stock market crash and the subsequent depression - Understand how the stock market operated - Explain the reasoning behind the New Deal - Debate the achievements and failures of the New Deal - Understand the historical roots of the American welfare state ## Presidents of the United States in the Twentieth Century | Name | Years in Office | Party | |---|---|---| | Theodore Roosevelt | 1901-9 | Republican | | William H. Taft | 1909-13 | Republican | | Woodrow Wilson | 1913-21 | Democrat | | Warren G. Harding | 1921-23 | Republican | | Calvin Coolidge | 1923-29 | Republican | | Herbert C. Hoover | 1929-33 | Republican | | Franklin D. Roosevelt | 1933-45 | Democrat | | Harry S. Truman | 1945-53 | Democrat | | Dwight D. Eisenhower | 1953-61 | Republican | | John F. Kennedy | 1961-63 | Democrat | | Lyndon B. Johnson | 1963-69 | Democrat | | Richard M. Nixon | 1969-74 | Republican | | Gerald R. Ford | 1974-77 | Republican | | Jimmy Carter | 1977-81 | Democrat | | Ronald Reagan | 1981-89 | Republican | | George Bush | 1989-93 | Republican | | William F. Clinton | 1993- | Democrat | ## The Harding Administration During World War I, the American government intervened in the economy as never before, and its powers considerably expanded. After the social, economic, and emotional upheaval of the war, many Americans hoped to return to an earlier, quieter, more stable life. The popular image of prewar America may have owed more to myth than to reality, but voters were attracted to politicians who promoted this idealized picture. One such politician was Republican Warren G. Harding, who became president of the United States in 1921. Harding was a handsome man (an important factor according to some contemporary commentators) who spoke in reassuring tones that appealed to the popular mood. He set the tone for the era when he called for a return to "normalcy." But what did "normalcy" mean with regard to economic policy and the relationship between the state and the economy? For Harding (who was not an economic theorist), it is difficult to say exactly what this meant. For many key people within the Republican Party, however, normalcy meant discarding the business controls that remained from World War I. Although the United States had seen considerable economic growth during the war years, Harding's administration found itself in a serious recession in the spring of 1921. The traditional economic response to hard times was to reduce government expenditures and allow the "natural" business cycle to restore prosperity. Andrew W. Mellon, Secretary of the Treasury, pursued this approach by cutting federal expenditures by over 20 percent. To stimulate growth, Mellon reduced federal taxes, particularly for wealthy Americans. Harding's administration also reversed the wartime trend of government involvement in the economy, and even offered naval ships to private business at bargain basement prices. The administration continued its support of business. Federal troops, for example, broke a coal strike in West Virginia in 1921, and the courts ended a railway strike the following year. Harding's standard response to union demands for protection was that traditional individualism needed to be revived. Labour unions represented a barrier to this individualism. ## The Coolidge Administration Harding's successor as president, Calvin Coolidge, was in many ways an even more enthusiastic cheerleader for the non-interventionist state than Harding had been. The new president declared that "the business of America is business" and set about constructing a "businessman's government." Coolidge's vision was laissez-faire. He was a firm believer that the economy would prosper solely on the basis of business leadership, not as the result of state intervention. This vision also applied to the presidency itself. As Irving Stone wrote, Coolidge "aspired to become the least President the country ever had; he attained his desire." Reductions to the graduated income tax continued under Coolidge. With Mellon still in charge of the Treasury, the tax on the wealthy was slashed from 40 to 20 percent in 1926. Two years later, corporate taxes were reduced even more. Soon, the courts joined in the assault on the social legislation and state intervention of the World War I era. Several Supreme Court rulings clipped the wings of organized labour and restricted the application of anti-child labour laws. At the same time that Coolidge adopted laissez-faire policies, his support of business involved the government in the private economy, and he in fact allied the federal government with big business. As the Wall Street Journal put it: "Never before, here or anywhere else, has a government been so completely fused with business." Some members of the Republican administration advocated limited government intervention in the economy to correct its faults. One such person was the Secretary of Commerce, Herbert Hoover. During World War I, he had earned a reputation as an expert administrator. After the war, Hoover sought methods to promote cooperation between government and business. As historian Ellis Hawley explained, "Hoover spoke for only one segment of the Republican administration, of course. His vision of governmental activism was not shared by such conservatives as Andrew Mellon and Calvin Coolidge. Yet the vision he set forth was clearly a major force in shaping public policy between 1925 and 1928. ## The American Economy in the 1920s What impact did these pro-business government policies have on the American economy in the 1920s? It is difficult to say what actually produced the prosperity that many Americans enjoyed during the 1920s-certainly these years were boom times for American business, and many Americans enjoyed the benefits of an improved standard of living. Per capita annual income went from $480 in 1900 to $681 in 1929. Real earnings grew, and many companies realized that working hours could be reduced without a loss in productivity. In fact, much of the economic growth and general affluence of the decade were due to dramatic increases in worker productivity, which often came as a result of new technology. For example, with the assembly-line techniques Henry Ford introduced, by 1925 a finished car rolled out of his plant every 10 seconds. At the close of the decade, almost 5 million cars were manufactured every year. Unlike in Europe, in America even families of modest means could afford a car, and there was about one car for every five persons in the United States at this time. As Henry Ford stated, "Machinery is the new Messiah." The popular mood went beyond a simple enthusiasm for new gadgets. A harsh new materialism emerged during the 1920s. As Coolidge put it: "Brains are wealth and wealth is the chief end of man." Even those institutions that one might expect to be shielded from this obsession for worldly gain appear to have surrendered to it. Bruce Barton's book, The Man Nobody Knows, quickly became a bestseller in 1925 and 1926. The book was a biography of Jesus Christ that portrayed him as a gifted businessman! Some Protestant pastors encouraged the salespeople in their congregations with the advice that they could make bigger commissions if they followed the Bible as their guide. The general American public was in love with what one commentator has called a "business civilization." A wake-up call from Wall Street changed their mood quickly. ## The Stock Market Crash of 1929 Although President Herbert Hoover declared that the American economy was "sound" when he was inaugurated in March 1929, there had been warning signs of danger from Wall Street, the heart of the U.S. financial district in New York, for some time. The stock market had grown rapidly for much of the decade, and thousands of Americans had invested in stocks hoping to get rich overnight. Many middle-class investors bought stock "on margin." This was done by making only a small down payment on the purchase of the stock and borrowing the rest from a stockbroker. If the stock rose dramatically, the investor easily repaid the loan. Of course, if the stock fell in value, the investor might have a difficult time paying off the loan. ## The Great Depression of the 1930s The Great Crash of 1929 was not the only cause of the Great Depression that followed. Many other national and international developments contributed. During the 1920s, large corporations such as General Electric and General Motors instituted new management techniques that increased productivity and enabled them to produce ever-larger supplies of consumer goods. Farmers used improved agricultural machinery to expand the amount of land under cultivation and produce more food for the market. Wages, however, did not increase as rapidly as did productivity, and by the late 1920s, the demand for goods could not keep up with the increased supply. In addition, droughts in the midwestern states in the late 1920s ruined crops and forced many farmers into bankruptcy. Thousands of banks also failed, wiping out people's savings. The spread of the depression to other countries discouraged consumers from buying American manufactured goods, which resulted in closed factories and increased unemployment. When most countries raised tariffs on imported goods to encourage local production, international trade was cut in half. Perhaps the most important problem in the U.S. economy was the enormous income gap between the rich and the poor. Large corporations had increased their profits dramatically during the decade, but had not increased employees' wages by nearly the same amount. Five percent of the population earned one-third of the country's personal income. This unbalanced distribution of income meant that the purchasing power of average Americans during the 1920s was dangerously low. Consumer spending was necessary to fuel the economy. Another factor that explains the crash was the high rate of corporate fraud. As one Republican attorney general explained, "I am not going unnecessarily to harass men who have unwittingly run counter with the statutes." Ironically, while laissez-faire beliefs had produced a situation that was harmful to the economy, many businesspeople opposed state intervention even when it would have made their sector of the economy more stable. Perhaps the best illustration of this short-sightedness was in American bank presidents' opposition to federal deposit insurance. If this program had been in place, scores of medium and small banks would not have gone under in the bank panic of 1932-33 because the government would have guaranteed people's bank deposits. ## Roosevelt's New Deal If President Hoover had simply run out of ideas, Franklin Delano Roosevelt seemed willing to try anything to get the American economy moving again. Roosevelt radiated an upbeat, confident charm and easily defeated the gloomy Hoover in the 1932 presidential election. In the campaign, Roosevelt had criticized Hoover for spending more money than the government took in and promised to balance the budget. However, after a brief period of caution, Roosevelt moved boldly to confront the economic crisis. His understanding of economics was not strong, but the new president was an activist and he gathered around him a group of advisers who were committed to making sweeping changes to the relationship between the state and the private economy. In accepting the nomination for president in 1932, Roosevelt declared, "I pledge you, I pledge myself to a new deal for the American people." The term New Deal was later used as the name for his economic reforms of the 1930s. In his first 100 days as president, Roosevelt pushed through Congress an impressive amount of legislation designed to save American capitalism from the deepening economic crisis. This first stage of the New Deal was primarily designed to promote recovery in the national economy. The president hoped to introduce improved management of the economy, especially of its productive capacity. He did not intend to do this through some sort of socialist economy, but by using the government to get business and labour to work together. The cornerstone of the New Deal was the National Recovery Administration. The NRA was a government agency with sweeping powers. It oversaw a vast number of separate industry boards that were composed of representatives from employers, workers, and government. Each of these boards set production and price quotas and established other standards for a particular industry. Earlier legislation had attempted to outlaw or restrict this sort of collaboration or conspiracy among manufacturers, but Roosevelt felt that some cooperation was now permissible, indeed necessary-as long as government and organized labour were also at the table in order to remedy the current economic mess. However, in 1935, the conservative Supreme Court declared the NRA unconstitutional. Other programs in the first phase of Roosevelt's New Deal attempted to lower unemployment through public works projects. The Public Works Administration (PWA) spent millions of dollars in employing labourers on a wide variety of construction projects, from sidewalks to post offices. The Civilian Conservation Corps provided training for young people by employing them to improve the nation's forests and parks. Roosevelt also created the Securities Exchange Commission to regulate stock and bond markets and thus prevent another crash. The Federal Deposit and Insurance Commission guaranteed that people would not lose their savings if their bank failed. By 1934, many federal policy-makers believed that the state had an important responsibility for the economic well-being of the country. However, not all Americans embraced this new interventionist view of the state, and conservative reaction to Roosevelt's programs (including the actions of the Supreme Court) prompted him to amend his approach. This second stage is often referred to as the reform phase of the New Deal. It included putting in place some of the essential building blocks for the American welfare state. The Social Security Act (1935), for example, established unemployment insurance and old age pensions supported by contributions from employees and employers. This act set the United States on the road that Canada and most European states had taken years earlier. In many ways, it represented a symbolic break with the fierce individualism and self-help philosophy of the past. Another key change was the establishment of the National Labor Relations Board (NLRB), which outlawed unfair labour practices. Under the NLRB, organized labour became a key actor in the management of the American economy, and the number of union members rose steadily from 3 million in 1933 to 7 million in 1940. This, too, represented a significant departure from the laissez-faire economy of the past. ## Evaluation of Roosevelt's Reforms Clearly, some important changes took place regarding the role of the state in the private economy. Yet in several critical respects, the New Deal itself was a failure. Most historians agree that the New Deal did not end the Depression. Unemployment levels remained high. The New Deal also failed to reach many poor people. The economy did not fully recover until World War II production began. The war did what many in the government were reluctant to do it introduced organized state planning and dramatically increased federal spending. The result was a booming economy and low unemployment. We must remember that Roosevelt faced substantial opposition to his New Deal. After 1934, big business attacked most of his programs. At the same time, the Supreme Court viewed many of the measures as a threat to constitutional liberties. Although the Court's position softened, clearly Roosevelt had to reckon with strong opponents both within and outside the government. Compared with his predecessors, however, he was flexible and laid the foundation for an American welfare system on which subsequent presidents built. The U.S. transformation that began in the 1930s was a profound and lasting one. As one analyst commented, "In the American mixed economy [of today], as in the private economy that preceded it, most of the important economic decisions are made by business executives. The difference now, a difference that grew out of the New Deal, is that other powerful players also help to determine the outcome of the game." One indication of the government's growing power was the expansion of the federal civil service from under 600 000 employees in 1929 to over 1 million a decade later. For the first time, the federal government acknowledged a responsibility to help the unemployed and the needy. Also for the first time, the government deliberately used deficit spending to stimulate the economy. The United States, however, remained basically capitalistic - the profit motive and private property continued to be fundamental beliefs. Thanks largely to the implementation of unemployment insurance, social security, and other government programs, a depression as serious as that of the 1930s has not returned. One of the many legacies of the New Deal was the widespread expectation that the government should take action in response to fluctuations in the business cycle. Roosevelt was not an economist; he was a practical politician who considered using deficit financing only as a last resort. The concept of stimulating consumer buying by pouring billions of government dollars into the economy, however, became the economic ideology of the post-World War II years. This theory, called Keynesian economics, held sway until the 1980s, when Ronald Reagan became president and adopted a new economic theory popularly termed "Reaganomics." Chapter 9 examines the theory behind these two economic ideologies. But before we explore the private enterprise system in more detail, it is important to study its major ideological rival, the centrally planned system.