7
-- Market Challenges I—The Great Depression
Click here for the PDF version.
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.
“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?
Dust
|
Relief
|
Child
|
Family
|
Mexican
|
Negro
|
Destitute
|
Bread line
|
Migrant
|
Faith
|
Prayer
|
Day laborer
|
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.
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.
[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.]