The Great Depression Summary

8th Period Summaries

The Great Depression Summary

·  1929-1939

·  Started after “Roaring Twenties” which was a time when production soared. Ended at the beginning of World War II

·  Not just the economy, it also affected people’s mental state

·  One cause was over speculation which is people putting excessive amounts of money into the stock market due to over confidence

·  Other main cause was poor distribution of wealth. This was caused by the high production during the “Roaring Twenties.” Production rose faster than wages so most profit went to the corporate side of companies.

·  Franklin Roosevelt’s New Deal was an attempt to bring the U.S. out of the depression as well as prevent it from ever happening again.

·  We are affected today through bank reforms, the Home Owners Loan Corporation, and the National Employment System Act. We are also affected through lessons learned about investing.

John Maynard Keynes

·  Keynes grew up during the Great Depression which influenced his beliefs on the economy greatly.

·  He believed that prices and wages were inflexible; he believed that price levels had no upward pressure on prices.

·  He believed that the government should intervene and put money into society in order to keep prices and wages constant.

·  Keynes said that when overall demand in an economy fell, unemployment increased output would tank, and the economy would hit another recession.

·  “Demand would create its own supply”

·  President Franklin Roosevelt added many social programs to the government thanks to Keynes’ theory.

·  Obama’s stimulus package was inspired by Keynes’ theory

·  In the short term, Keynes believed the aggregated supply curve was horizontal.

ALAN GREENSPAN

-Longest-serving chairman of the Federal Reserve Board, held post for 18 years

I.  Greenspan’s Belief

A.  Objectivist thinker, follower of Ayn Rand

B.  Proponent of Laissez-faire capitalism

C.  Focused on keeping interest rates low and inflation under control

D.  Believed in little to no government intervention

II.  Important Events

A.  October 19, 1987 “Black Monday,” stock market’s largest one day percentage loss in stock market history

i.  Greenspan avoided economic collapse by promising Wall-Street that the Fed would give money and aid, returning consumer confidence and correcting the market

B.  Dot-Com Bubble, burst in 2000, causing technology companies to lose trillions of dollars

i.  Predicted by Greenspan who warned against “irrational exuberance” and that the stock prices were overvalued

C.  Housing Crisis and current recession

i.  Believed by many that Greenspan is to blame because of low interest rates and lax polices on mortgage lending caused the housing bubble to burst. Also the fact that he was a proponent of sub-prime lending caused the current credit and housing crises.

Alexander Hamilton

·  Early Days

o  He was born in 1757 as the illegitimate son of James Hamilton and Rachel Faucett.

o  He worked as a merchant’s clerk in the Virgin Islands.

o  He moved to the colonies after his dad left and his mother died to advance his education.

·  Early Career

o  He supported the war, joined the military, and became lieutenant colonel on George Washington’s staff.

o  He Studied law and was elected to the Continental Congress.

o  He started the Bank of New York

·  Political Career

o  He attended the constitutional convention.

o  He wrote many of the Federalist papers.

o  He was appointed as the first Secretary of the State.

o  He wrote five reports in the first two years.

·  Hamilton’s influences in today’s economy

o  He influenced the creation of the national bank, ability to tax, unified revenue as well as many others

Immigration in the 20th century

·  In 1900, 448,572 persons migrated to America. This can be contrasted with the 660,477 that made the trip in 1998.

·  However, percentage of population has decreased dramatically

·  The National Origin Act of 1929 was about a strict quota system established to prevent people from entering the U.S.

·  The Immigration and Naturalization Act of 1965 removed all racial quotas and opened its doors too many non-European immigrants.

·  Good for the economy because it brings skilled labor into the country.

·  Greater competitiveness and productivity.

·  With the inventions of planes and technological advancements, accessing the world has become simpler.

·  Numbers today have increased but again percentage of immigrants to population is decreasing.

The Marshall Plan

The Economy after WWII

·  After WWII, many European countries were devastated and economically exhausted

·  The US was the only superpower to come out of the war almost unscathed (booming economy)

·  The threats of the USSR and communism began to spread throughout Europe

The Plan and Its Use

·  Developed by Secretary of State George Marshall

·  Europe will create its own group recovery plan, the US will fund it

·  Almost all Western European nations favored the plan and formed the ECA (Economic Cooperation Administration)

·  Russia rejected it and came up with the Molotov Plan (Russia’s version of the Marshall Plan)

·  Over $13 billion given over $13 billion were given to the ECA

·  Received most money: Britain, France, and West Germany

·  Europe mainly traded with America for material needed for recovery

·  Aid lasted from 1948-1951, fasted growth period in European history

Effects

·  Accelerated European recovery

·  Set the stage for the cold war

·  Stopped the spread of communism over Europe

·  Laid the groundwork for the EU

·  A model for modern day development in poor countries

John Nash Summary

Personal Background

v Nash was different from other kids of his time

o He was basically a genius and attended MIT for math and science

v In the early 1950s Nash developed the Nash Equilibrium which improved decision making in economics.

v He married his wife in 1957

v Two years later he developed schizophrenia and his wife admitted him to a mental institution.

Economic Life

v John Nash’s prime was in the 1950s economic decade

v Introduced the Nash Equilibrium

o Used with game theory

v Nash Equilibrium:

o Make decisions with a live variable or another person/firm making a decision

o Ability to find the best possible outcome for yourself, not thinking about the other persons possible failure

v The Nash Equilibrium applies to many different life situations

o Business decision, war, and even horoscopes (on a broader level)

Industrial Revolution

·  Samuel Slater defied British law and came to America to share the ideas of the Industrial Revolution, which led to the Industrial Revolution in America. Her started by building his own textile mills that would become widespread through America and helped produce more resourcefully.

·  Revolution changed producing of goods from handmade to factory made, which increased efficiency and enabled the American economy to grow.

·  It also improved transportation (national roads, steam boats, canals, railroads, planes) and communication (telegraph).

·  Effects of the Revolution today include increased standard of living in America, as well as Labor laws.

·  The laws control the amount of hours a person can work each week, the working conditions, lunch breaks, and age requirements, all of which are still present in American economy today.

·  There was a population shift a people from farms to the cities due to openings in the assembly lines and operating machineries which caused the formation of slums

·  Eli Whitney created the cotton gin which helped boost agriculture and the slave trade by more efficiently pulling the seeds from cotton. Also, the inventor first to create the system of interchangeable parts for muskets.

Globalization Summary

·  It is the interaction and the ties made between different countries around the world.

·  The term has been around for centuries but Globalization boomed in the 1980s and continues to develop to this day.

·  Globalization not only affects the economy but also the culture and the politics of a country.

·  It affects politics when it comes to laws and regulations, dealing with injustices, and non- government organizations.

·  It affects the culture when it comes to understanding and accepting, identity of a nation, and sharing with others.

·  There are pros to Globalization: free trade, innovations and inventions, smaller differences between currencies, beneficial for less developed nations.

·  There are cons to Globalization: leads to people losing their jobs, cheap labor, intolerable working conditions, lack of resources and capital for poorer countries.

Henry Ford and Mass Production

·  During the time this came about, the mentality of many people was that for as long as they could remember, inventors had produced one wonder after another, and there seemed no reason why this should not go on forever.

·  The car industry was no longer dependent on how long a human could make a car but rather how fast could a machine make the car.

·  Mass-produced goods are standardized by means of precision-manufactured, interchangeable parts.

·  By establishing the assembly line, Ford was able to bring the car to the worker rather than the worker going to the car, making the whole process much more efficient.

·  Instead of one person making each car, every person would specialize in one area of the car. This cut the time it took to make a car by almost 11 hours.

·  Mass production modernized the manufacturing business and is used in almost all manufacturing businesses to this day.

Adam Smith – “The father of modern economics”

1.  Born in Scotland in 1723

·  Grew up in the economy of mercantilism.

·  An economic nationalism for the purpose of building a wealthy powerful state.

·  Also, this era was the beginning of the industrial revolution.

2.  1776 – published the Wealth of Nations

·  Also the year of the signing of the Declaration of Independence.

·  This book contains many of the modern day concepts of economics.

3.  “Invisible Hand”

·  Greatest benefit for a society is when society follows a free-competition market.

·  Everyone acts in their own self-interest

·  Economy will always fix itself out of troubles (Classical View)

4.  Compensating Differentials

·  People get higher wages because

o Their jobs are more difficult to learn.

o Their jobs involve risky or unsafe behavior.

5.  Specialization

·  Businesses are more efficient when tasks are spilt up between workers, rather than having each worker do every task. This causes more productivity.

·  Smith’s famous example of pins.

6.  Role of Government

·  “Laissez-Faire” – no intervention from government

·  Needed only to enforce patents or copyrights, so there are incentives for people to invent new products or ideas.

·  Provide only things that will benefit all; ex: public roads

David Hume: Economist, Philosopher, Historian

  Scottish Economy

¡  Time of the Scottish Enlightenment

  Act of Union Treaty of 1707: United England and Scotland. Lifted trade barriers off of Scotland.

  Old Fashioned Economy

¡  Scotland’s economy was far behind due to the fact they had not gone through industrialization.

  Economic Growth

¡  Was experienced during this time period.

  Economic Ideas

¡  Price Specie Flow Mechanism: Refuted British Mercantilism. If imports are limited and exports are maximized inflation will occur. Imports and exports need to be near the same level.

¡  Beneficial Inflation: Injecting money into the economy will provide economic growth in the short run.

¡  Special Advantage: All countries have unique resources, so they should all trade in order to increase the variety of goods available on the international market.

¡  “You cannot deduce ought from is”: Positive/Normative Economics

¡  Commodities: invest instead of spending/saving money

  Contributions to Modern Society

¡  Keynesian Economics

¡  Trade

¡  Positive/Normative Economics

¡  Investing

Mercantilism

·  Mercantilism was the dominant economic theory held by European nations from the 16th century though the 18th century.

·  The goal of mercantilism was to increase wealth by maintaining a favorable balance of trade by exporting more than a nation imports.

·  It became evident that the nations with the strongest Navies would succeed.

·  The time period was very much centered upon accumulating bullion, any metallic currency.

·  Governments would put policies into place that made imports hard to come upon for its citizens. Examples: tariffs, exempting new industries from taxes, disallowing skilled laborers from leaving the country

·  These paranoid policies allowed for countries to control their net exports in a way that favored their national economy even if it was detrimental to the international economy.

·  The Navigation Act of 1651 and the Staple act of 1653

·  Mercantilism ended after publication of Wealth of Nations (1776)

Dot.Com Bubble Summary

Background

·  Very stable economy

·  High stock prices

·  Low interest rates

·  Companies have excess capital to invest

·  Many technologic innovations arising

Bubble

·  Companies invest in many tech stock

·  Prices begin to soar

·  Rest of world over-speculates and buys large sum of stock

·  Hundreds of smaller companies as well as larger begin to focus on monopolizing market

·  Since there were so many companies with same product, monopolization became impossible

·  Most companies saw little to no profit

Burst

·  Hope in technology market dwindled and investment vastly decreased

·  Stocks plummeted

·  Interest rate increased

·  People began spending much less than previous years

·  Smaller companies closed, larger one’s monopolized their products

·  Market was left with dominating companies such as Ebay, Amazon, and Aol

John Stuart Mill

·  Born in 1806 in England when laissez faire economics was the dominant economic theory

·  Was taught economics by his father, James Mill, who was a philosopher and economist for the East India Company

·  At age of 20, Mill suffered a nervous breakdown and turned to utilitarianism for help

o  Mill believed that people should make decisions based upon what will maximize the total happiness of all people