Chapter Thirteen

Fear Itself

The Great Depression

The Great Crash

Imagine yourself in the 1920s. Fashion is on the rise, the streets are lit up by electricity, new entertainment like movies and radio always give you something to do, and wages are rising high enough that you still have enough money left over to go to the club and try this new "Swing Dancing". How could you not be optimistic about the future?

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The Great Depression was a global economic crisis that rattled the world to its core. This picture, taken by Dorothea Lange in 1936, depicts destitute pea pickers in California. The woman is Florence Owens Thomson, a 32-year-old mother of seven. Florence was travelling with her family when the timing chain on their car snapped, and they coasted to a stop at a camp of 2,500 people all out of work. When the photo was taken, they had just sold the tires off their car to buy some food. The image has come to symbolize the angst and despair of the depression, which carelessly threw millions of innocent people into the awful throws of poverty. --Our story of the Great Depression starts in late October 1929. The economy had just experienced a decade of strong economic growth and prosperity. If you had invested $1,000 in 1921 – a decent annual salary for the time – you would have had about $6,000 by 1929. But in the summer of 1929, things started to stall. --During the 20s, optimism about the future was high, and many Americans accepted newly available offers of credit in order to buy what they could not afford from their own wallets. They bought new wonders like radios, electric refrigerators, and most visibly, they bought cars all on installment plans, which more than doubled household debt. At the time, the stock market had become a curiosity to most Americans, who kept hearing about traders making fortunes. The chart here shows the amount of money being lent to traders by their brokers so they could buy stocks on margin. The stock market had become one giant financial bubble, driven both by the credit pushing up revenues for businesses listed on the exchange, and credit being used to buy the stocks on margin. Everyone was operating on the Greater Fool Theory, planning to cash out before prices fell. The financier Joseph P. Kennedy, one of the richest men in the world at the time and the father of future president John F. Kennedy, liquidated his stocks in 1928 and early 1929 saying, “Only a fool holds out for the top dollar.” Legend has it that he decided to sell when he got a stock tip from a shoeshine boy, intuiting then that if his money was in the market, there were no fools left to push prices any higher. Kennedy would eventually be appointed as the first chairman of the Securities and Exchange Commission, regulating Wall Street wrongdoing under President Roosevelt. --With the credit starting to dry up, households started to work on paying down their debts, slowing their purchases of the big-ticket items. From the beginning of the year to October, the unemployment rate had jumped up by 2.3 percentage points, creating the first unemployment problem in a long while. Auto sales, which had been a major driver of rising stock prices, had started to fall, and department store revenues were dropping too. Whispers started to circulate that the U.S. was entering a recession. --Then came Black Thursday, when panic and uncertainty hit Wall Street. With a decade of rising stock prices, many had overextended themselves on their margin accounts. They had borrowed significant amounts of money and put it all into the market, certain that the good times would keep on coming and they would be able to make a fortune.--On that Thursday, the Dow Jones Industrial Average fell by 11% the moment the stock market opened in the morning. Billions of dollars had been lost in an instant, and panic started to spread. A group of prominent bankers – and viewers, I have to tell you, these guys were not good dudes, among them eventual Nazi sympathizers – but nevertheless they were the ones with the money, and they did their best to repeat the success of J.P. Morgan in 1907. Since the panic was just in the stock market, and not in banks, the Federal Reserve didn’t step in. Their aim is overall economic stability, not stability in the portfolios of a bunch of Wall Street brokers. But the efforts of the bankers to push up stock prices seemed to work, and the Dow Jones closed just 2% below its opening price.On Friday, there was some more ups and downs, but for the most part the markets were calm, and closed just a couple points above their opening price. But over the weekend, papers covered the events of the past couple days. And most people were feeling it was time to get out while they still could. When the New York Stock Exchange opened back up on Monday, the Dow Jones fell by 13%, and this time it didn’t recover. News spread quickly, and anyone who wasn’t sure on Monday was ready to sell on Tuesday, when stocks dropped another 12%. In just two days, nearly a quarter of value of the stock market had been lost. Hundreds of investors, especially those who bought on margin, were completely wiped out. Nevertheless, optimism generally persisted. Many believed this was just a brief crash in the stock market, and nothing to worry about. These things happen. And while the next two months were rough for investors, with the stock market losing about half of its previous value, the market turned upward in early 1930 recovering a good chunk of what was lost. Most expected things to recover quickly after that, and that growth would continue again. President Herbert Hoover said, “Any lack of confidence in the economic future or the basic strength of business in the United States is foolish.” --The optimism lasted through March of 1930, but it was followed by four years of economic decline. After the stock market crash came a series of banking panics in 1930 and 1931, and then a series of national and international financial crises from 1931 through 1933. The downturn hit bottom in 1933, when the commercial banking system completely collapsed. The Great Crash of 1929 gets a lot of attention and is popularly thought of as the cause of the Great Depression, but it isn’t as important to our story as it may seem. While the crash of 1929 curtailed economic activity, its impact faded within a few months, and by the fall of 1930 economic recovery appeared imminent. Then, problems in another portion of the financial system turned what may have been a short, sharp recession into our nation’s longest, deepest depression.

Apple Sellers

In 1930, apple farmers produced a massive bumper crop, but had nowhere for it to go. Joseph Sicker, an apple man, thought to send the apples to New York, where they could enlist the unemployed to sell the excess apples. Thousands of men and women showed up to buy a crate of 80-100 apples for $1.75 so they could sell them on the street corners for 5¢ a piece. For many, it was the first money they had made in months. An article in the New York Times wrote, "Wherever the little boxes of apples stand a listener has no trouble in getting from the vendor the story of a long period of unemployment, misery at home and of near-starvation." The many photographs of these apple sellers have remained a lasting image of the Depression.

A Deep Depression

The Great Crash of 1929 led to a sharp economic downturn, but it did not cause the Great Depression. What turned the recession of 1929 into a depression was a failure of action. Banks which were perfectly sound were allowed to fail, the aid of friends, family, and charity quickly ran out, and people were left trapped in an economic system that was no longer functioning.

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After a couple weeks of turmoil in the markets, stock prices started to rise again as many anticipated an economic recovery. As we have noted, these sorts of panics and recessions were not uncommon. They had typically lasted an average of 15 months, and now with the Federal Reserve system in place many expected them to be less severe. The stock market crash followed what was truly the beginning of the recession, marked by the decline in economic activity starting in the summer of 1929. By the fall of 1930, it had been 15 months, and things seemed as if they might be back to normal. --But a new crisis was brewing across the nation’s banking system. The Federal Reserve had been established to prevent banking panics from spreading by keeping banks solvent during a crisis. Banks in the Federal Reserve System keep their reserves with the Fed and have access to the Fed’s Discount Window allowing them to borrow the cash they need to keep their doors open in the event of a bank run. But most banks at the time were not part of the Federal Reserve System, at least not directly. About 16,000 of the nation’s 24,000 banks were not part of the Federal Reserve System. Most were small country banks which kept most their reserves with a correspondent bank that served many of these smaller banks in a sort of smaller scale version of the Fed. Most of these correspondent banks were part of the Federal Reserve System, but some were not. One such outlier was Caldwell & Company, which was a large and growing financial holding company in the South. Caldwell invested heavily in the stock market, taking deposits from their many subsidiary banks and using them to buy stocks. When the market crashed, their financial position grew increasingly precarious. They limped on for many months afterwards because one of their subsidiaries, the Bank of Tennessee, provided banking services to the state and continued to receive deposits. But by November of 1930, they no longer had the cash they needed to stay afloat, and their failure set off a wave of failures among the correspondents that kept their reserves with them. Panic spread from town to town, and bank runs ensued. --By December, there was considerable stress on banks nationwide as worried depositors withdrew their cash. Remember, at this time, if the bank you kept your money at went under, you lost everything. Many just didn’t want to take that risk. Eventually that pressure fell on a New York bank called the Bank of the United States. It was a private bank but was part of the Federal Reserve System. The Bank of the United States reached out the Fed in dire need of a loan to save itself from a run. But other bankers disliked the bank and its success for two reasons. First was the name. Immigrants and even citizens mistook the bank for the official government bank or central bank, even though it was private. Second was the ownership. It was Jewish, and anti-Semitism robbed people of their reason. At the Fed, they used excuses about not wanting to bail out a failed enterprise to keep them from doing the job they were designed to do, and instead of saving the Bank of the United States, they let it fail with over $200 million in deposits, money that was now lost to those depositors. This event, like the collapse of Caldwell, generated newspaper headlines throughout the United States, stoking fears of financial panics and currency shortages like the Panic of 1907 and inducing jittery depositors to withdraw funds from banks everywhere.--With money being withdrawn, and the credit markets freezing up, the money supply was falling, and with it went prices. The price level fell by 2.7% in 1930 but fell by another 8.9% in 1931. Falling prices reduce consumption by incentivizing customers to wait until prices fall even more before making a purchase. Deflation also reduces the value of assets like homes and commercial real estate. The result is that even more loans made by banks go bust, because they were made under the expectation of higher prices making it possible to pay them back. With more investments going bad, depositors had even more reason to worry about the money in their savings accounts. And when these banks fail, it is hard to get lending started again, because the knowledge of who had good and bad credit disappears with those banks. --In September of 1931, Britain announced it was leaving the Gold Standard. Speculators had observed that Britain did not have enough gold to cover the money they had printed and could not meet the obligations of their Gold Standard. They quickly pounced, exchanging the pound for gold, forcing Britain to abandon the monetary regime. Many Americans concluded that Britain’s move meant that the US would also abandon the Gold Standard, so they rushed to withdraw their deposits—in the form of gold coins, if possible—which worsened the growing problem of currency hoarding. Foreign investors also cashed out, leading to a huge outflow of gold from US banks and the Federal Reserve to foreign destinations. In the midst of an unprecedented banking crisis, the Fed was forced to raise interest rates in order to attract gold bank into their vaults to maintain the legal Gold Standard, and the higher rates pushed more borrowers into default and more banks into distress. In the following month, there were 522 bank failures! --The economic picture over this time grew increasingly dire. What was a typical recession 1930 turned into a depression in 1931 when GDP fell another 16.1% and unemployment skyrocketed to 15.8%. But the banking crises had led to thousands of bank failures. Nine million savings accounts were wiped out. Without access to credit, industrial production fell by nearly half. Homebuilding came to almost a complete standstill. Over a million families lost their farm. And by 1932, a quarter of the labor force was unemployed. Since this was a time in which most families only had one breadwinner, it meant that nearly a quarter of all Americans were left without an income. Millions became homeless. Children left their parents to spare them the difficulties of feeding them and set off to other parts of the country looking for work and a chance to support themselves. But these statistics bury the destitution that was faced by so many millions of people who suddenly struggled to get enough food, let alone shelter and clothing. And this economic hardship fell disproportionately on women and African-Americans, who often were fired from their jobs to make room for a white man. And while Americans had turned down the economic intervention offered by William Jennings Bryan a few decades before amidst the Long Depression, many were starting to turn to their government for help when all other hope was lost. --The Hoover administration had been reluctant to intervene in the economy, but as the depths of the depression became evident, they were spurred into action. Congress acted in 1932, funding a new government-sponsored corporation called the Reconstruction Finance Corporation, and Hoover tapped the most vocal dissenter of the discombobulated Federal Reserve to run it. Where the Fed was reluctant to intervene in what it saw as a market correction to the excesses of the 1920s, the RFC would now step in – funded with $2 billion by Congress - and make the emergency loans to banks in trouble. The new law also reformed some restrictions on the Federal Reserve, and the pressure from Congress and Hoover pushed them into using Open Market Operations to purchase millions of dollars’ worth of government securities. Both of these measures had immediate and positive effects on the economy, but they did not last long. The Fed abandoned its Open Market Operations by the summer of 1932, far too early, and the RFC was required by law to publish the names of the banks it made emergency loans to. In doing so, they inadvertently alerted the public to the precarious state of those banks, which ended up creating rather than preventing bank runs. --As the summer waned in 1932, 43,000 demonstrators descended on Washington, D.C. They were all veterans of the first World War. For their service, veterans of the war were given certificates which promised them a cash payment, with all interest accrued since 1924, which could be redeemed in 1945. Many of the veterans had already taken out loans against the value of their war bonus, and they were asking Congress to allow them to redeem their certificates early. Many of them were destitute, with nowhere else to go, and so they camped in D.C. for weeks until Hoover ordered the military to remove them, which they did so violently and with the aid of six tanks. Perhaps the most popular man in America at the time was Father Charles Coughlin, whose weekly radio broadcast reached the entire nation. “If the government can pay $2 billion to the bankers and the railroads,” he said, “why cannot it pay the $2 billion to the soldiers?”In November, when Hoover was up for re-election, voters decided it was time to give someone else a shot. --Franklin Delano Roosevelt won the 1932 election by one of the biggest margins in U.S. history. He had followed in the political footsteps of his distant cousin, Theodore Roosevelt. Just like him, he had been elected to the New York State Legislature, became the Assistant Secretary of the Navy, and was elected the Governor of New York. And while Teddy campaigned on promise to give every American a “square deal”, Franklin promised Americans a “new deal”. And he got to work immediately after his March 4th inauguration by declaring a four-day banking holiday which closed every single bank in America, including the Federal Reserve. For those four days, every American was locked out of their bank accounts. At the end of those four days, he signed into law sweeping reforms on banking and gave the first of his famous “fireside chats” where he calmly attempted to restore people’s faith in the financial system. Banks were slowly reopened once they were determined to be sound, and slowly but surely customers returned their stockpiled cash to their savings accounts. By March 15th, the Dow Jones Industrial Average went up 15.34 percent, to this day the largest one-day percentage gain in the history of the index. All that was left was to keep the banks sound and get the American economy running again.

Bailey Bros. Building & Loan Association

The 1946 film It's a Wonderful Life follows George Bailey, who owns a Building & Loan in town. Many commercial banks did not offer mortgages, and so smaller outfits like Building & Loans helped fill the void. If you wanted to borrow money to buy a house, you had to buy shares in the B&L as a sort of down payment. The B&L loaned you the money, and each month thereafter you agreed to buy more shares in the company. Once your shares were enough to cover your loan plus the interest, you could "cash out", and pay the B&L back. The upside was that if the B&L was successful, its share price would rise, and the shares you purchased initially would grow in value too, making it easier to repay your loan. And of course, all the money the B&L used to make the loans came from the sales of the shares.

I really hope you will watch this whole movie, but for now, watch this scene where George Bailey finds his bank in the midst of a run.

The New Deal

Listen to Roosevelt's first Fireside Chat on the Banking Crisis (March 12, 1933).

"So, first of all, let me assert my firm belief that the only thing we have to fear is...fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

- Franklin D. Roosevelt, Inaugural Address, March 4th, 1933

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As he took office in 1933, President Roosevelt navigated the banking crisis with a national banking holiday that forced banks closed, preventing anyone from withdrawing their money, followed immediately by a banking bill designed to restore confidence in banks and get customers to deposit the cash they were hoarding. A few months later, this was followed by a more substantial banking bill that has come to be known as Glass-Steagall, after the two senators who pushed it through. The main provision of Glass-Steagall separated commercial banking from investment banking. Prior to the law, banks could and would frequently use depositor money to buy securities like stocks in corporations or to speculate on their value. This exposed banks to the risks of the stock market, and when the market would crash as it did in 1929, depositors would be rightly worried that their bank had lost too much money in the turmoil. With Glass-Steagall, that was no longer allowed. Commercial banks which took in depositors' money could not buy and sell a significant number of securities. Now, only investment banks, which took in investor money for the explicit purpose of buying and selling securities and speculating, could do those things. In essence, Glass-Steagall separating banking for Main Street customers from banking for Wall Street investors, breaking the connection and reducing the risk commercial banks exposed themselves to. --More importantly for depositors, Glass-Steagall established the Federal Deposit Insurance Corporation, which insures bank deposits with a pool of money collected from banks. Private insurance of course already existed, and many depositors preferred to keep their money at a bank where those deposits were insured so that if the bank failed, the insurance company would pay them back the money in their savings account. But the massive wave of bank failures that sunk us into the Great Depression also put those insurance companies under, unable to pay so many claims all at once. The FDIC would operate like one of those companies, usually running a surplus in funds. But when things got apocalyptically bad for banks, the FDIC would have the full faith and credit of the U.S. government behind it. President Roosevelt was opposed to the FDIC and threatened to veto the bill over it because he was worried that the Federal Government would not really be able to come through during a Depression-level event, but he was convinced by the authors of the bill that the mere existence of the FDIC would hopefully prevent that. Both sides turned out to be right, to a degree. During the Savings & Loan crisis in the 1980s, the FDIC depleted all its funds and needed $153 billion in taxpayer money to pay out all of the insurance claims from depositors. Nevertheless, the reason the whole idea of bank runs has seemed foreign to you, like a problem that doesn’t exist anymore, is because of the FDIC. Today, the money in your checking account is insured up to $250,000, which means you can relax and not worry about losing it all in a crisis like they did prior to 1933. Glass-Steagall effectively solved the problem of bank runs, though in 1999 Congress repealed the parts of the law which separated commercial and investment banking, a decision which haunted, and some say worsened, the 2008 financial crisis. But we will get to that in a few chapters. --Beyond just addressing the financial sector, President Roosevelt also wanted to deliver immediate relief to regular people. In April of 1933 he pushed through legislation establishing the Civilian Conservation Corps, which hired 500,000 young men by 1935 for any and every public works project that could be found, such as building roads, bridges, shelters, power plants, parks, and more. The Federal Emergency Relief Administration came shortly after in May and gave grants to the states for relief programs. Like the CCC, the aim was to fund public works projects identified by the states which would then hire unskilled labor to complete them. FERA funded state-level works programs, but also formed the Civil Works Administration to fund $400 million worth of projects around the U.S. While it would have been cheaper and more effective as economic relief to just give people the money spent on these projects, the attitude and morality of day led both Americans and Roosevelt to prefer the sprawling bureaucracies needed to put them to work. In the end they laid 12 million feet of sewer pipe, built 255,000 miles of roads, 40,000 schools, 3,700 playgrounds, and almost 1,000 airports. --The economic decline bottomed out in 1933, four years after the recession had started. But where past recessions had a pattern of a rapid drop followed by a slow recovery, the Great Depression was four long years of rapid drop after rapid drop. But Roosevelt was determined to see a speedy recovery. Indeed, in 1934, with the banking crisis resolved and the government putting millions to work, the economy grew by a staggering 17%. And in 1935, the economy continued its fast-paced growth with an 11.1% increase in GDP. But even with these incredible growth rates, unemployment remained stubbornly high, and was still at 20% in 1935. --Roosevelt pushed several more major pieces of legislation through in 1935. In addition to another banking act which empowered the Federal Reserve with a greater ability to regulate banks and combat panics, Congress passed the Works Progress Administration. It replaced the Federal Emergency Relief Administration from 1933 and was given $5 billion – which amounted to 6.7% of GDP - to put Americans back to work. It was the most divisive of FDRs policies. In a 1939 poll, 23% said that it was the worst part of his New Deal, making it the most unpopular program on the list. Many Americans didn’t like this level of government intervention and spending. But that same poll showed that 28% of Americans thought it was the best part of his New Deal, making it the most popular program on the list. Also in 1935, the Social Security Act was passed, creating one of the most lasting and beloved institutions of the American government. Social Security would provide a direct monthly payment to seniors – at the time the poorest group in America which was left particularly poor by the Depression – funded by a payroll tax paid by employers and employees on the income that they earn. While the first benefits would not be paid until 1940, the payroll taxes started in 1937. This along with a tax increase on the wealthy mandated by the Revenue Act of 1935, revised in 1937 to close loopholes, meant a much larger tax burden on just about everyone. --While 1936 and 1937 saw record growth and significant drops in unemployment, 1938 saw another brief recession pull back on that progress. Luckily, this time the downturn was short-lived, and the economy was bouncing back in 1939, as well is in 1940 and 1941, when unemployment finally dropped below 10%.The success of the New Deal is debated to this day. While most agree that Roosevelt managed to end the banking crisis, many contend that these programs to put people to work put capable men to work doing useless things and may have slowed the recovery. John Kenneth Galbraith, a prominent economist who worked in the Roosevelt administration, said that the real impact of the New Deal was to give market power to those who did not have it, and to act as a countervailing power. Workers who took jobs with the WPA were paid well and reliably, in contrast to the common seasonal unemployment and unreliable paydays they faced in jobs in the private sector. These workers had choices now, and private employers had to improve pay and job security to compete. Roosevelt saw himself as saving capitalism with his efforts. He avoided programs which put private companies under government control, or regulated their activities, as was done in Soviet Russia at the time. Instead, he wanted to create government run programs which would compete directly with private businesses, and act as a sort of yardstick for efficiency, for any private business should be able to outcompete the slow and bureaucratic government. --Of course, at the end of 1941 came the attack on Pearl Harbor, and the U.S. entry into World War II. While historians credit the war with finally bringing an end to the Depression, economists do not. The economy was recovering and would have continued to recover without diverting valuable resources to unspeakable human destruction. However, with those who enlisted no longer part of the labor force, the unemployment rate did normalize quickly as the U.S. prepared for war. But the economics profession itself was in turmoil. The Great Depression stood in contrast to the theories of quick recoveries and the impossibility of a long-running collapse in production. And while Roosevelt was delivering on his promise of action, an economist in Britain was finishing his magnum opus which would attempt to explain recessions, and their recoveries, in a completely new way. It was a theory he had been developing since the early 20s, when he wrote a book decrying the economic consequences of the treaty that ended the first World War, in which he predicted the World War the U.S. was now marching into.

The New Deal created an alphabet soup of acronyms to go with the bloating bureaucracy. This "Periodic Table" from the Roosevelt Presidential Library puts the New Deal in perspective.

If you were elected President in 1932, which of these programs would you support? How would you have tried to steer the country out of the Great Depression?

periodictablenewdeal.pdf

The Economic Consequences of the Peace

A century-and-a-half prior to the Great Depression, a change in rhetoric which celebrated innovation brought about the Industrial Revolution and a great enrichment of the formerly poor. But the turbulence of the first half of the 20th Century led many people to reconsider that arrangement, electing or submitting to leaders who imposed a new kind of command economy on them. Economists had been wrong about recessions, and the consequence was a Great Depression. Now with the world at stake, new ideas would be needed.

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In 1918. U.S. President Woodrow Wilson saw a path to peace for a world at war. He had been re-elected in 1916 by promising the U.S. would stay out of the European conflict, but circumstances took us to war anyway. The Germans were losing, the German people knew it and were starting to rebel against Kaiser Wilhelm II, and Wilson saw an opportunity to end the war early, and hopefully prevent another one, by allowing the native peoples of Europe to control their native lands. The Russians would get Russia, the French would get France, the Italians would get Italy, the Germans would get Germany, the Polish would get Poland, the Turkish would get Turkey. Down the list he went. Essentially, he wanted to give the people of Europe autonomous control of themselves. Sadly, though Wilson stopped with Europe, and did not seem at all bothered by the brutal colonialism that was oppressing native people of color around the world. And while Wilson was not particularly keen on forcing Germany to pay war reparations, he conceded to them at Versailles, where the final treaty was negotiated. Wilson wanted to let the powers of Europe off scot-free for this horrible and pointless war, recognizing that there was plenty of blame to go around, but France was insistent. Germany would pay for the war. The Treaty of Versailles ended up being a compromise in all the wrong directions. --The economist John Maynard Keynes was the principal representative of the British Treasury at the Paris Peace Conference, and he tried in vain to achieve the fairer principles for a lasting peace set out in President Wilson’s Fourteen Points. He said, "I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.” Keynes wrote The Economic Consequences of the Peace, arguing that the reparations would be so disastrous for Germany, that they were bound to seek revenge rather than pay them. The book ended up being a surprise best-seller. --Keynes was right to be worried, though the war reparations were not as burdensome to Germany as he believed. They could have been paid. But he was right that the German people were not eager to make sacrifices to pay for a war their leaders had pulled them into. The German Emperor was replaced by the Weimar Republic, which elected its leaders. Rather than making the tough choices, the elected leaders passed many populist programs to aid the German people as they recovered from the war, while also keeping taxes low. With all this additional spending, in combination with the reparations, the only way to pay for it without raising taxes was to print more money, which is exactly what they did. Inflation came quickly, but it was manageable for a few years. By 1922, however, inflation reached staggering levels. In 1922, a loaf of bread cost 163 Marks. By September of 1923, you needed 1.5 million Marks to buy a loaf of bread, and just two months later, a loaf of bread cost 200 billion Marks. People had to be paid every hour, and they would run home to get the money to their families so they could go out and spend it right away before it became worthless. The picture here shows a man using Marks as wallpaper, as they had become totally worthless. Eventually, the currency had to be completely replaced, which finally happened in 1924, but not without a great deal of economic and political instability. A group of 2,000 political extremists attempted a violent coup d’état, inspired by the successful one led by Benito Mussolini in Italy the year prior, but in Germany they were put back by police in what would be called the Beer Hall Putsch. The leader of the attempt was jailed for treason, but judges sympathetic to his cause gave him a light sentence. He wrote a book from prison, and the whole affair made his name, Adolph Hitler, known to the world. --After World War I, the United States had shifted almost overnight from the world’s biggest debtor to the world’s biggest creditor. New York was providing more loans to the world than London, and the war-impoverished world needed this credit to get back on its feet, often striving to produce goods and services that they could then sell to America in order to pay off their debts to America. Economic growth in Latin American countries like Chile, Bolivia, and Peru was dependent on these loans, as were the economies of Britain, France, and Germany. Beyond this special place in the global economy that America held, these countries were also bound together by the Gold Standard, which meant that the relative value of their currencies could not fluctuate, meaning that their gold reserves would. When the Great Crash of 1929 hit America, it rapidly spread to these other countries and panic about American gold led many to withdraw the gold they had in these foreign banks, pushing up interest rates in those countries and instigating recessions in all of them. What’s more, American banks, desperate to liquidate their assets for cash to meet depositor demands, called in their loans to many of the banks, businesses, and enterprises in these foreign countries. Particularly hard hit was Germany, who relied on American loans to keep paying its war reparations without risking hyperinflation again. By mid-1931, Germany’s financial system was in freefall. President Hoover called for a moratorium on reparations payments, but France objected, as they were reliant on them to get by themselves. Unemployment in Germany reached 25% in 1932, but with a deep fear of inflation, the government did not do anything to ease the pain. Unemployment rose further to 30%, and that summer the German people were divided. They elected Communists and Nazis, but the re-elected president Paul von Hindenburg agreed to a deal that made Adolph Hitler the Chancellor of Germany mere months before Franklin Roosevelt would be sworn in as the American President.--Industrialization brought incredible wealth to the average person, lifting them out of poverty and into a Bourgeois life. But it also made monsters out of the monarchs and despots who still had control over their countries, and they turned the power of industry on each other, and on the world. World War I proved so violent and devastating that the nations of the world resolved never to do it again. But they couldn’t agree on how. All the while, the people of these countries, ignored by the powers that be, were paying the price of the conflict. Then a global economic depression came, and in their despair, they turned away from the liberty that brought about our economic miracle and towards the opposing forces of socialism and fascism. But rather than allow the socialists to destroy their economy, the fascists were content to elect, quite frankly, the worst people in the world who instead took away their liberty and marched the world again to the brink. We today, and indeed the world, are tremendously lucky that America managed to find a different path in which our extremists were sidelined by competent leadership, and a continued belief in liberty. I always hesitate to editorialize like this – Ok, no I don’t – but I do so to make one very critical point: it is economic conditions that drive these world events. The business cycle wasn’t just threatening our economic prosperity, it was becoming an existential threat to humanity itself. And despite the best efforts of the classical economists, it was a problem that had definitely not been solved for good. There was a need for fresh ideas. Luckily, the world had John Maynard Keynes.

Quick Quiz

Now is the time to test yourself on these concepts! This quick quiz is a great way to see what has clicked and what needs more attention. It is also a good time to reach out to your instructor with questions.

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Deeper Thoughts and Extra Practice

Dr. Goegan Explains...

Example Question
Hyperinflation has struck your country! The economy is experiencing 0.75% inflation every minute. Your boss has just paid you $803 for your work that day, and you need to spend it fast before it loses its value. It takes you 30 minutes to get to the store, pick your items, and go to the register.

Adjust the $803 for the inflation that has occurred over the 30 minutes to find your real wage for the day at the time you were paid.

Hint #1: If there was 5% inflation, and I wanted to adjust $100 to its value before the inflation occurred, I would divide by 1.05.

Hint #2: The growth formula is (1 + i)^t

Do not round until your final answer, at which point you may round to two decimal places.

Video Solution

Dr. Goegan Explains...

Example Question
Consider the following two scenarios.

Scenario 1 - Uninterrupted Growth

Per capita GDP starts at $864 and grows by 6.1% each year for 4 years. Then it continues to grow at 6.1% for 82 more years.

Scenario 2 - A Depression Before Growth

Per capita GDP starts at $864 but a recession lasting for 4 years shrinks GDP per capita by 18% for each of those years. Then the economy recovers and grows by 6.1% for the next 82 years.

How much lower is per capita GDP at the end of Scenario 2 compared to Scenario 1?

Note: If the Great Depression never happened, and the U.S. experienced normal growth over those years instead, GDP per capita today might be as high as $180,000. Since our GDP per capita is more like $60,000 today, that means we have $120,000 less per person today because of the Depression. So, with those numbers, my answer to this question would be "120,000".

TL;DR - Enter your answer as a positive number, not a negative one.

Round your final answer to two decimal places.

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