7 -- Market Challenges I—The Great Depression

 

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Issues:

1.  If the American economic system is as wonderful as discussed topic 6, how could a “Great Depression” ever be possible?

2.  Can and should the government alter market conditions to enhance economic performance or avoid poor performance?

3.  What is the legacy of the New Deal?

 

            Student Outcomes:

1. Students will be able to describe the factors, some of which we continue to experience today, that caused the Great Depression, the largest economic catastrophe in the history of the country.

2. Students will be able to explain Keynesian economic policies and describe how they continue to influence economic decisions in American today.

3. Students will be able to describe the basic principles of monetary policy and how it is used to regulate the economy in America today.

4. Students will be able to assess how the human misery of the Great Depression continues to affect the American political and economic landscape today.

 

Note: First day's readings: pages 1-8. Second day's readings: pages 9-12. Note that a project is required. Students should come to class prepared to teach the other students in the class what they have learned through preparing for the class and be able to provide evidence to support their ideas.


7 Market Challenges I—The Great Depression

 

      Although the strengths of the market system bring freedom and prosperity, these things do not come without some costs.  There are weaknesses in the Market System which should be understood.  These weaknesses include: production instability, price instability, the unequal distribution of wealth, and the susceptibility of the market system to a lack of economic virtue.  The weaknesses of the Market System are, in part, the price paid for the economic freedom it allows but Americans have, overtime, sought to find ways to reduce the impact of these weaknesses while at the same time maintaining as much freedom in the economy as possible.  The strengths of the market system provide great benefits to the participants but there are risks, especially if the participants do not use their economic freedom wisely.

 

Price and Production Instability

 

      One of the most glaring weaknesses of the Market System is production instability.  Given the fact that millions of individual people make millions of decisions each day about what to buy and what to produce, there is no way that demand and supply will always be in equilibrium throughout the entire market for goods and services.  Sometimes production will exceed demand - at other times, it is difficult for production to keep up with demand.


 

 

 


          The above diagram describes the ups and downs in production in the economy over time.  At times total production in the economy drops below what might be considered slow steady growth, the ideal.  Recession is defined as a general slowdown or decline in economic output.  Depression is defined as a larger, more serious decline in economic output.  Recessions and depressions are usually based on general trends in the economy but they have both collective and personal consequences.  As someone once said “a recession is when my neighbor looses his job, a depression is when I loose my job.”

 

1. What is the general nature of production instability or the inevitable cycles of business activity?

 

         There are several causes of production instability in the economy.  Some causes are related to the day-to-day decisions made by business managers: inaccurate decisions about trends in future markets, over production of goods and services, or reduced investment in future research and development, and taking profits now rather than investing for the future.  Other causes are related to consumer actions, for example a decline in overall demand, often related to a lack of consumer confidence.  Another condition that causes a recession is when wages do not keep pace with the production of goods and services.  Workers do not have the income to purchase the production that exists, surpluses build up, and eventually production must decline to allow sales to catch up with inventory.  Another frequent cause of recessions or depressions is a national or world crisis such as war or natural disaster.  America has the advantage that its economy and geography is so large that regional disasters seldom hurt the overall economy.  This can be much different in a smaller country like Honduras after a major hurricane.  Another cause of recessions would be economic disruptions in world markets.  America is not an economic island. Foreign economies in recession can heavily affect the American economy.  In today’s world, recessions can also result from inappropriate  actions by the government—no action at all when it should have taken action, or an inappropriate use of fiscal or monetary policy when it does take action

 

2. What are the general causes of recession?

 

      Fiscal policy can be defined as government spending used to stimulate production or government taxing used to smooth out the ups and downs in the economy.  Fiscal policy is controlled by Congress and the President.  It is important to note that government taxing and spending is only fiscal policy when it is used to manage the economy, not when they are part of the normal operations of government.

      Fiscal policy is closely related to the economic philosophy of John Maynard Keynes.  Keynes, a British economist, was famous for his economic argument that in times of recession or depression, decreasing prices do not necessarily encourage more consumption by the public as indicated by the laws of supply and demand.  In fact, in times of depression, prices may fall and consumers may still not have the ability to enter the market place, make purchases, and thus encourage more production.  Keynes argued that in those times a government should use its borrowing and spending power to increase demand and encourage production.  Keynes’ argument was seen as radical at the time.  Many even called it socialist since the government (state) took responsibility for managing the economy.  In actuality, the Keynesian theory sought to explain and overcome one of the inherent weaknesses of capitalism rather than use that weakness as an excuse to overturn the system as had Marx.

 

3. What is fiscal policy?  How do the principles of Keynesian economics relate to fiscal policy? 

 

            Price instability, a second inherent weakness in the Market System, creates the problems of inflation or deflation.  Both conditions can be destabilizing and harmful to the economy and to individuals.  Inflation is generally defined as the average of all prices going up. During periods of inflation the value of money goes down because each dollar actually buys less.  Deflation is defined as generally declining prices.  The value of money during a period of deflation actually increases because each dollar buys more. (Note: there was in the early 1970s a condition referred to as “stagflation” when America experienced both price inflation and production recession.)

 

4. What are the general characteristics of Price instability?

 

      Historically, most inflation has occurred during periods of war but there have been both periods of inflation and deflation over the course of American history.  Since World War II, there has been a continuing pattern of inflation in the United States.


 

 


5. What are the historical patterns of inflation and deflation in the United States?

 

            In attempting to measure inflation, indexes are created and used.  Examples of these indexes are the “consumer price index” and “the wholesale price index.”  A consumer price index is created when the government takes a survey of the price of goods consumers purchase regularly.  Each month the total price of those goods is compared to the months before.  If the price is going up, that is considered to be inflation.  If the price is going down, that is considered to be deflation.  The wholesale price index simply attempts to measure inflation or deflation before it reaches the consumer level.

      When inflation takes place there are those in the economy who are “winners” and those who are considered “losers.”  The losers during a period of inflation are creditors, those who loan money, like banks.  Of course bankers recognize this opportunity for loss and plan to protect themselves by charging sufficient interest to cover their losses, but in a highly unstable market this does not always work.  Savers, or money holders, also lose money during inflation. This is because often the interest rate paid to savers does not keep pace with the growth of inflation and the value of the money they are saving declines.  Despite this ability to lose, it is important to note that saving is still important.  Without savings individuals cannot be prepared against economic “rainy days” nor can they take advantage of economic “opportunities.”  At the same time without savings there would not be sufficient capital in the market to allow for new investment and growth.

      The winners during inflation are those who borrow money, debtors, or those who own real estate.  When money is borrowed to finance the purchase of a home in times of inflation, for example, the borrower is able to pay off the mortgage using dollars that are worth less and less as time goes on.  When the home is finally paid for, inflation will have also made the value of the home go up, thus the debtor wins again.  The government is considered a major winner during inflation as well, because the government is probably the greatest borrower in the economy.

 

6. Who are the winners and losers in the economy during periods of inflation?

 

      There are several causes of short-term inflation.  One of them is when there is an increase in the total demand or decreases in total supply.  A key price increase can also cause inflation, such as when the price of oil raised dramatically in the mid to late 1970s (maybe even today).

      Long-term causes of inflation usually occur when there are increases in the overall money supply that exceeds the increase in the overall production of goods and services.  In short: too much money chasing too few goods.


 

 


      When the money supply grows at the same rate as the Gross Domestic Product (GDP), the increase in money supply will not cause inflation.  Money supply is defined as the total amount of money available for consumers to spend.  Many argue that the money supply needs to grow overtime to allow for growth in the economy, thus allowing for increasing production and population growth without deflation. 

 

7. What are some of the basic causes of short-term and long-term inflation?

 

            As the Constitution indicates, the government has a vital role in providing a medium of exchange and controlling the value of the money it creates.  In the early 1900s it was also determined that there was a need to manage the supply of money as well.  The Federal Reserve System was created to give the American people more control over the money supply through their representatives in government rather than have the money supply controlled by private banks that might have their own motives. 

 

8. Why was the Federal Reserve System Created?

 

      The Federal Reserve’s use of various methods to regulate the money supply is called monetary policy. There are two important tools within the Federal Reserves chest of monetary policies.  First, they influence interest rates such as the rates charged to banks to borrow money from the Federal Reserve. When the Fed raises interest rates, banks also raise their rates, consumers borrow less money, and therefore the money supply contracts.  When the Fed lowers interest rates, banks lower their rates, consumers borrow more money, and the money supply expands.  The Federal Reserve can also regulate the money supply through the buying and selling of government securities.  When the Fed sells securities it takes money out of the money supply and when it buys securities it increases the amount of money in the money supply.

 

9. How does the Federal Reserve use monetary policy to manage the money supply in an effort to manage inflation and deflation?

 

10. How would the government use monetary and fiscal policy to fight the affects of recessions and inflation?

 

                                                                                    Recession                        Inflation

 

            Monetary Policy . . . . . . >                      

 

            Fiscal Policy

           

            Taxing Power . . . . . >                      

 

                  Spending Power  . . . >   

 

            Though there are many good uses of monetary policy, there are also problems.  First, when using monetary policy to fight a recession, you may actually cause inflation and vice-a-versa.  Second, because the Federal Reserve controls monetary policy when things are going good in the economy the Fed is praised.  When things are going bad, the Fed becomes perceived as the cause and is accused of wielding too much power.  There are also a few inherent dangers in using fiscal policy.  Using fiscal policy to fight recessions (cutting taxes) can be politically popular, but can lead to deficit spending.  It is also difficult to use fiscal policy to fight inflation (raising taxes).  It is politically unpopular and too slow.  Lastly, no matter what, the use of Fiscal policy is always very political since it is controlled by the president and congress.  

 

      America has for the most part avoided depressions and wild swings in inflation and deflation since the end of World War II and have enjoyed a relatively stable economy and a moderately growing inflation rate.  There are several reasons for this condition.  First, a reason for continued inflation can be found in the general attitude of the American people.  People prefer rising wages and profits to declining wages and profits and this makes it difficult to adjust to prices shifting downward.  Second, environmental concerns and increased scarcity of some key resources has caused production costs to continue to rise.  Third, there are automatic stabilizers built into the system, such as cost of living adjustments in entitlement and welfare programs, thus each increase in the economy triggers further increases in government payments. Fourth, the Federal Reserves’ aggressive use of monetary policy to stimulate and maintain economic growth increases money supply a little too fast to keep the economy growing.  And fifth, the increased use of fiscal policy to stimulate and maintain economic growth has caused the problem of constantly fighting recessions by fighting increasing government spending.

 

11. What reasons can be given for the sustained inflation of the post World War II period?


The Great Depression as an Example of the Business Cycle

 

The Great Depression was probably the worst economic disaster in American history and the best example of the problems of production and price instability.  Beginning in 1929, the Great Depression created business losses and personal suffering on a scale Americans had never experienced before.  My grandmother’s experience with the Great Depression led her to save everything from buttons and zippers to used clothing.  When my dad’s shirts were worn out, she asked him to bring them to her so that she could remove the buttons, cut out the seams, and reassemble the material back into a smaller shirt for me.  Another survivor of the Depression experience feared being without food to the point that she saved leftovers forever.  Her children, fearing for her safety, regularly cleaned out her refrigerator but eventually decided they should have mom move in with them so they could more closely monitor what she ate.  Mom, still unwilling to throw the food in her fridge away, packed up the food and mailed it to her new address.  The box arrived a few days later smelly and dripping.

No one who experienced the Great Depression would ever forget it nor would they ever again be quite as positive about the strengths of a truly “free” economic system.  The depth of the Depression led people to demand help from the government and eventually they received help on a scale no one had really planned or anticipated.  The legacy of this “New Deal” would change the nature of American politics and economics forever.

Prior to the Great Depression economic ups and downs, recessions and depressions, represented what seemed to be a normal part of the business cycle in a free economy.  Nothing exemplifies this attitude better than Herbert Hoover’s claim that like every time before this “slump will liquidate itself.”  Unfortunately for America and the American people, the length and depth of the depression led many to believe that this depression was different—it would not liquidate itself, and without the government’s help, it seemed, the entire economic system may collapse.

      No one event caused the Great Depression, rather it was the result of a series of interconnected conditions.  Generally the conditions that led to the Great Depression were over production after WWI and throughout the 1920s on the part of farmers and businesses, under consumption of products on the part of consumers whose wages were not keeping pace with the rise in the price of goods and services, speculation in the Stock Market often financed by borrowed money, and the failure of international economic markets. These four conditions acting in concert put the economy into a free-fall that seemed to have no bottom.  Between 1929 and 1933 when President Roosevelt took over from President Hoover nearly every aspect of the economy got worse and worse.

 

 12. What economic conditions contributed to the Great Depression?

 

            It would be unfair to say that Hoover did nothing to help the American people deal with the effects of the depression.  He initiated federal construction projects like Hoover Dam to help stimulate the construction industry and he started the Federal Reconstruction Finance Corporation which provided federal money to banks and insurance companies to help them avoid bankruptcy.  Unfortunately, these efforts were not nearly expansive enough to pump the amount of money into the economy to do as Keynes had suggested and get the economy going again.  In addition, since most of the money went to banks, insurance companies, and construction companies, people accused Hoover of being more interested in helping banks and businesses than people. 

            One major protest of the time, the Bonus Army, was also handled badly by the Hoover Administration.  The Bonus Army was made up of WWI veterans who wanted to receive their service, bonus checks immediately rather than waiting until 1945 when they had originally been promised.  The Bonus Army began their march in Pocatello, Idaho and by the time they arrived in Washington, D.C. it included thousands of veterans, their wives and children.  They protested on the steps of the capital and then moved to a nearby park and set up a temporary tent-city to await the President’s and congress’s help.  Hoover turned down the request and asked Douglas MacArthur to take care of the protestors.  Using soldiers and armored cars MacArthur drove the protestors out of Washington and burned the tent-city.  MacArthur handled the episode badly, but Hoover got the blame—again he was accused of having no desire to help the suffering people.

            Hoover wanted to help but he was constrained in his response by his belief that giving people economic relief by putting them on the “dole” would ruin their self-reliant character.  He also had no governmental model for government intervention in, and management of the economy.  By the time the election of 1932 came around, it was felt that anyone could have defeated Hoover at the polls.  In fact, Franklin D. Roosevelt was elected by a landslide by promising to find government ways to save the economy.  In addition to Roosevelt’s election to the white house, the Democrats took a majority of the seats in the house and senate.  Roosevelt too had constraints, but he was willing to go much farther than Hoover.

      In 1933, Roosevelt began the program he called the “New Deal.”  The program was based on the principles of Keynesian economics (thought there is no evidence that Roosevelt really understood them) and had many facets designed to provide relief, recovery, and reform for the American people and economy.

      The Civilian Conservation Corps (CCC), Public Works Administration (PWA) and Works Progress Administration (WPA) were created as tools to help the American people get through the Great Depression.  The Government took responsibility for providing jobs and providing a basic level of income for Americans through what today would be called workfare.  The Government also took responsibly for managing both segments and regional aspects of the economy when they created the Agricultural Adjustment Act (AAA) and Tennessee Valley Authority (TVA).   

      The government encouraged the creation of jobs in the private sector and took responsibility for the protection of labor’s right to organize unions and for unions to represent labor’s interests in conflicts between labor and business.  These rights were protected with the implementation of the National Industrial Recovery Act (NIRA) and the Wagoner Act. In the creation of the Securities and Exchange Commission (SEC) the government took responsibility for the regulation of economic markets.  In the creation of the Social Security Administration (SSA) the government took responsibility for the economic well-being of a segment of society particularly susceptible to economic crises.

 

13. What government programs during the Great Depression illustrate the changes in American economic philosophies?

 

The New Deal did not bring the Depression to an end, only the massive public sector spending associated with WWII could do that, but it did seem to stop the economic free-fall.  The New Deal does provide several economic legacies, however, that continue to influence the government’s response to economic challenges to this day.  First, as a result of the New Deal people came to accept the government’s role as problem solver, economic stimulator, and economic regulator.  Government became responsible to intervene in the interest of economic well being and economic justice and to provide an economic safety net to protect people from economic disaster.  These ideas were outlined in What FDR called his “Economic Bill of Rights.”  Second, the new deal strengthened the notion of big government in America.  New agencies were created to administer each of the New Deal programs and more and more Americans found themselves working for the federal government.  Third, the New Deal shaped the future of both the Democratic and Republican parties.  Henceforth, the Democratic party would be seen as the party committed to find government solutions to economic problems while the Republicans became more committed to finding private solutions, though by the end of the Depression no party or politician could really hope to successfully remove economic responsibility from the government.  And fourth, the New Deal helped maintain faith in American democracy and capitalism.  Many were convinced that the Great Depression demonstrated the failure of capitalism in America.  Thousand of Americans joined the communist party of America and other actually moved to the Soviet Union where the economy was “better.”  But the New Deal, taking place in the moderate atmosphere of American political conditions was meant to save the market not to change its fundamentals.  Other nations in the 1920s and 30s like Germany and Japan took avenues to deal with the affects of the depression but America’s response was remarkably conservative.

 

14. What are the legacies of the New Deal and how do they continue to influence American economic decisions today?          

 

Paul Solmon, A Falling Domino of US Economic Issues

http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21032008&seg=1

 

Paul Solmon, The Cause & Effect of the Credit Crunch.

http://www.pbs.org/newshour/video/module.html?mod=0&pkg=solmanblog&seg=1

15. After watching the two clips above, describing the economic challenges in the financial markets today, what similarities and differences do you see between the stock market crash of 1929 and the “crash” of today.  What role is the government expecting to play today and how is that affected by the legacy of the Great Depression?  Compare and contrast the attitudes of the people now (you) with the attitudes of the people then (your great-grandparents) in the face of these market challenges.

 

      Americans, and members of the church, need to resist feeling that they are entitled to financial support and economic protection from either the government or the church.  Financially, as in other areas of life, people are agents unto themselves.  Wherefore, men are “free according to the flesh; and all things are given them which are expedient unto man. And they are free to choose liberty . . . , or to choose captivity.” They should also resist shifting the responsibility for personal financial welfare from self-reliance to the church or the government.  Neither financial success nor financial security are rights for Americans, when and if it comes, it is a privilege.  Just because America has not suffered a major economic depression since the 1930s is no guarantee that one will not occur again.  The only person who can protect you from such economic downturns is yourself.

 

      For more information, you may want to check out the website at www.providentliving.org.  

 

 

  [End of first day's readings.]

 


“Brother, Can You Spare a Dime?”

 

            In this section you will work together in groups to produce one of the following three projects.  Your group will select a project.  There will not be enough time in class to share the results from all of the groups, but students from a few groups may be chosen at random to make their presentations.  Presentations are limited to about 10 minutes. (Suggestion: appoint one person in your group to be the tech specialist.  Let the tech specialist take the responsibility for putting your project onto the computer and into PowerPoint, and making sure that the finished product will “play” on the computer in.  Everyone else in the group should be prepared to “make” the presentation when called upon to do so.)

 

You must ensure prior to class that your presentation is accessible by the classroom computer system in order to present it to the class if called upon to do so. 

 

A Project on the Human Emotion of the Great Depression

 

Project # 1:

            Access the YouTube website on the internet.  Type in the search terms “Brother Can You Spare A Dime.”  Look for the YouTube music video of Al Jolson singing the famous song from the depression era and watch the images connected to the song.

            As a group, pretend that the current financial situation continues to decline and we fall into a second Great Depression.  Create a music video, using Al Jolson’s or a more modern arrangement (but the same words) of Brother Can You Spare a Dime, but using images from the modern era that depict what we see as the glory of our economic capacity and how that collapses.  (Make sure that images are appropriate for BYUI.)  Be sure to try and capture the human emotions and misery of such an economic depression.  (If you know of another song that captures the modern experience better than “Brother Can You Spare A Dime,” you are welcome to use it.  Just be sure that the lyrics and images are BYUI appropriate.)

            As a group you will be expected to be prepared to show your video to the class.

 

Projects # 2 & 3:

Prepare PowerPoint slides (seven in total—a main title slide, and six slides of discussion—no more, no less!) of the most important ideas that you discover in your research of one of the two projects below.  During our class discussion, I will be calling on one individual randomly from a group to teach us about these topics, with special emphasis on the human emotions and misery of the Great Depression. Therefore, everyone but the technology expert needs to be prepared to teach.

 

Your note slides must contain the text that you will use to teach the class if you are called upon to do so. So, in addition to printing in color the seven original slides, you must print as “Note Pages” all seven slides as well.  (You may need to learn how to create “notes” pages on PowerPoint.  They can really enhance your presentation.  Keep the text to a minimum on your presentation slides and then put complete notes on you “notes” slides.  One you show to the class, the other you hold in your hand and refer to.) 

 

Project # 2:

 

The Photographs

 

Your team will choose a set of six photographs that he/she thinks are particularly relevant to the human emotion and/or misery of the Great Depression.   The team will then write up answers to the following questions about each photo in the set.

 

From the Library of Congress’ photographs listed below, you will need to pick at least four for your PowerPoint presentation and answer the following in your slide and your teaching:

 

·       What is happening in the picture?

·       What are the circumstances represented in this photo?

·       If there are people in your photo,

* how are these people dressed?

* what can you infer from the expression on their faces and their posture?

·       If there are no people in your photo,

* describe the condition of any man-made objects in the photo.

* discuss what seems to have led to these circumstances

·       Is there anything interesting or surprising about the situation represented here?

·       What problems or frustrations are suggested by this image?

·       What adaptations can you assume or infer people are making to these conditions?

·       What help seems to be needed here?

·       What is unique about this image that the photographer wanted to capture?

 

The Photograph Collection

Source:  The Library of Congress, American Memory at

http://memory.loc.gov/ammem/fsahtml/fahome.html.

 

This photographic collection contains thousands of photos relating to experiences occurring during the Great Depression.  Any of the photos in the collection can be used for your class presentation.    Note that by going to the main website listed above, you can search for photos based on key words.  Listed below, as examples, are several key words and the photos associated with them.  In addition to the key words and photos listed below, you might also try searches on the following key words:

 

Dust

Relief

Child

Family

Mexican

Negro

Destitute

Bread line

Migrant

Faith

Prayer

Day laborer

 

Also note that when you display a photograph you are also given the opportunity to “Display Images with Neighboring Call Numbers” by clicking on the link.  You may actually find more interesting pictures by viewing these photos as well.

 

Other Key Word Searches and Photos

Refugees

Houses

Hooverville


Men's dormitory

WPA (Works Progress Administration)

 

Project # 3:

 

The Life Histories

 

Each team will choose a life history as listed in the table below (or choose one of your own from the thousands found at the “American Life Histories Manuscripts from the Federal Writers Project 1936-1940” website).  Team members will then review the selected life history and answer the following questions.  All team members will then review the responses, searching for commonalities and differences, and compile a summary of the data on your PowerPoint presentation.

 

  1. What is the general tone or attitude of the person being interviewed?  
  2. What do you infer about the person/family from their tone or vocabulary as recorded in the interview?  
  3. What are the circumstances of this person's life?  
  4. What seems to have led to these circumstances?  
  5. What can you infer about the general emotional state of this person from what he/she says?  
  6. Is there anything interesting or surprising about the situation represented by this interview?  
  7. What problems or frustrations is the interviewee dealing with?  
  8. What adaptations can you assume or infer the person is making to his/her situation?  
  9. Explain any assistance or programs you can identify that are presently helping this person.  
  10. If you had some power or authority and could make something good happen, something realistic, what would you propose as a way to help the interviewee improve his/her circumstances?

 

The Life Histories Collection

Source:  The Library of Congress, American Memory at

http://memory.loc.gov/ammem/wpaintro/wpahome.html

 

This literary collection contains thousands of life histories relating to experiences occurring during the Great Depression.  Any of the life histories in the collection can be used for your class presentation.    Note that by going to the main website listed above, you can search for life histories based on key words.  Listed below as examples are several key words on which you might want to search. 

 

Dust

Relief

Child

Family

Mexican

Negro

Destitute

Bread line

Migrant

Faith

Prayer

Day laborer

 


Below are some examples of tender stories associated with the Great Depression.  You may use these in your presentations as well. 

 

Anna Alden

Minnie Caranfa

Experiences of a Farm Owner

Miss Henrietta C. Dozier

Four Families

Mountain Town

The Howes

Mr. and Mrs. Frederick Goethe

I Managed to Carry On

Mrs. Janie Bradberry Harris

Italian Munitions Worker

Myron Buxton

Janie Solomon

Not Much of a Day for Walking

Jack Dillin

Reminiscence

Laura Bickford

Unable to Stage a Comeback

Lolly Bleu-Florida Squatter

Unwelcome Caller

Mary Watkins and her Family

WPA Road

 

 

 

 

[NB: Some of the material herein may be the work of Gary Marshall and Eric Walz. Marshall’s content may appear in a forthcoming publication.]