EK Unit 5

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Laissez-faire economics

(1776) One of the guiding principles of capitalism, laissez-faire economics claims that an economic system should be free from government intervention or moderation except to preserve peace and property rights. After several years of being restricted under Great Britain's statist control, the US wanted a more anti-statist form of government. This revolutionary hatred formed the ideals of laissez-faire. In Adam Smith's book, The Wealth of Nations, published in 1776, he described this economic system which directly translates to "let go" or hands off." The foundation of this system was believed that the government's involvement in the market would be extremely limited, almost nonexistent. Economists hoped that this would allow for the market to self-correct in case of recessions. A less involved economic system was more favorable in the US in order to maximize individual liberty and social welfare. Additionally, its goal was to increase the pursuit of individual's self-interest, which would force business owners to offer the best goods at low prices. However, laissez-faire was not completely beneficial and led to low wages, poor working conditions, long hours, child labor, weak unions, and a great lack of equality. This "government hands off system" is the basis conservative or libertarian views and was largely in place during the 1920's; without regulation, this system through the US into depression.

Anti-statism

(1776) The idea describing the opposition to state intervention into personal, social, and economic affairs. It prompted the thirteen colonies to rebel against the English statist government/monarchy led by King George III during the American Revolutionary War. After the overthrow of the monarchy in 1783, the newly-established US attempted to create the first anti-statist government through the Articles of Confederation. However, the Articles of Confederation failed because the government it attempted to establish was too weak, as it did not have an executive branch to enforce laws, or a national court system to interpret laws. The US eventually succeeded in forming an anti-statist government through the establishment of the Constitution, with its system of checks and balances. This long-standing suspicion of government intervention largely shaped American policy and conservative ideas, such as the "return to normalcy" policy in the early 1920s. These ideas contributed to President Herbert Hoover's reluctance to adopt statist policies in response to the economic problems during the Great Depression. Consequently, Hoover responded with policies centered around the idea of volunteerism, approaches that were mainly anti-statist. This idea trusted that the economy would correct itself, and contributed to the formation of organizations like the Reconstruction Finance Corporation, Federal Farm Board, and National Credit Corporation. Ultimately, these policies failed to improve the economic state of the US, and led to anti-statism being labeled as one of the main causes of the Great Depression.

Statism

(1776) The idea that the concentration of the economy should be in the hands of a highly centralized government. During the American Revolution, American colonists fought for their independence against Great Britain. After defeating GB, there was much debate about creating an anti-statist government, because GB was a monarchy, and very statist. Anti-Statism is the opposition to government intervention into personal, social, and economic affairs. The Articles of Confederation created a very anti-statist USA. The Constitution helped make a stronger national government, but still was anti-statist. Anti-statism dominated the US in the 19th century, where big corporations dominated the US economy and the laissez-faire theory dominates. Laissez faire economics refers to the government keeping its hands off the economy. Laissez-faire is very anti-statist. The Progressive Era (1890-1920) was when the power of the government was used to help solve social and economic problems. This was statism in practice. The US govt broke up bank monopolies, enforced food and drug saftey, protected the environment, and regulated banks and railroads. After 1920, the 12 year republican presidential rule highly promoted Anti- statist ideologies, eventually causing the Great Depression. The failure of Hoover's anti-statist responses to the Great Depression leads to FDR taking office and pursuing a much more statist approach.

Agricultural Overproduction

(1920s) During World War I, American farmers increased production due to a lack of European production and high demand for food for soldiers. As a result, the United States experienced an agricultural boom, developing new machines and specialised farming techniques which further increased production of agricultural products on a large scale. However, this formed a bubble for farmers, causing them to believe that they should continue to produce more and more crops at such a high rate. After WWI, Europe resumed production of agricultural products, and as a result, US farmers weren't required to produce a surplus anymore. This surplus, without sufficient traders, caused crop prices to plummet, and farmers struggled to find buyers for their crops, suffering through economic depression even before the recognised start of the Great Depression. The government then formed the federal farm board, but it was ineffective due to the voluntary nature of the program. Next, the government implemented the Haley-Smoot tariff, which provoked raised tariffs throughout Europe. This signified the beginning of the global economic collapse.

Industrial Overproduction

(1920s) Industrial overproduction, the increase in manufacturing of consumer goods throughout the 1920s, was a leading economic cause of the Great Depression. Industrial overproduction was a result of new technologies, such as the assembly line, which allowed for less expensive and more efficient construction of consumer goods like automobiles. Although higher production lowered prices, wages only increased one-fourth as fast as productivity. Another downside was that the bulk of accumulated profits went to corporations rather than workers thus contributing to the growing gap between the wealthy and the poor. During the Great War (1914-1918), an increase in production was reasonable and necessary to equip soldiers with proper supplies. However, maintaining the rate of production equivalent to that during the war was superfluous and harmful due to the unbalance between wage and productivity. With industrial production increasing seventy percent from 1922 to 1928 without a similar increase in wages, consumer credit outstanding grew over one billion dollars culminating in the economic collapse of The Great Depression lasting from 1929 until the late 1930s.

Income and Wealth Disparities

(1920s) The widening gap between the richest 1% and the poorest 42% in the 1920's were caused by laissez-faire economics. Under the Laissez-Faire administrations of the 20s, business owners pocketed their profits or reinvested them in their companies, instead of increasing the wages of their workers. With no intervention from the government, such as the introduction of a minimum wage, the top .01% lived in decadence, while the bottom 42% didn't see the prosperity of the 20s that their work had contributed to. Income and wealth disparities were one of the primary causes of the Great Depression. Only the top 0.1% of American families had an aggregate income equal to the bottom 42%. Income was being distributed with increasing inequality, particularly in the later years creating a larger gap. The bottom 42% tried to keep up with the top 1% by using installment plans (credit) to buy goods they otherwise couldn't afford, leading to a bubble in the banking industry -- when people couldn't pay back their loans, the banks failed. This led to the creation of the National Credit Corporation (NCC) in 1931 to try to re-stabilize banks, another one of Herbert Hoover's failed attempts to bring America out of the depression. The overuse of credit led to Industrial Overproduction -- demand for consumer goods is artificially propped up by the use of credit, leading to a bubble in the industrial sector of the economy -- production of more goods than can be purchased with real money (as opposed to the expectation of future money).

Federal Farm Board

(1929) The Federal Farm Board was one of Hoover's response to the Great Depression that was created in 1929 before the Stock Market Crash in October. It was created to help stabilise dropping crop prices due to Agricultural Overproduction, by buying surplus crops and holding them in large warehouses to get excess crops off the market until market prices rose. The federal government's goal was to make farmers lower their production of crops by promising to buy them. This did not work because Herbert was anti-statist, therefore there was no enforcement by the government. Instead, they just strongly encouraged farmers to decrease their output. The farmers did not cooperate and instead, began to overproduce their crops because they knew they could sell it to the government. Overall, the Federal Farm Board caused the government to lose money, and not solve the problem of agricultural overproduction.

Herbert Hoover

(1929-1933) Herbert Hoover was elected in 1928 as the third Republican president in a row. He served as Americas 31st president from 1929-1933. President was his first elected office but he had also been an American delegate at Versailles and was the director of the US food administration during WW1. He was also the Secretary of Commerce under Harding and Coolidge. He ran for office on the ideals of lower taxes, rejection of farm subsidies and the continuation of prohibition. With the Great Depression during his term, he responded with anti-statist policies, such as voluntarism and local and state action. To deal with the economic crisis, voluntarism relied on businesses and farmers to voluntarily take action to help the economy instead of being compelled by the federal government - laissez-faire economics. Hoover formed many organisations including the Federal Farm Board, National Credit Corporation, Reconstruction Finance Corporation and the Hawley- Smoot Tariff Act in order to try to revive the country. None were very effective, yet Hoover was persistent. Hoover was the connection between the plan-less failure that was the economy under Coolidge and FDR, who brought in statist policies.

Smoot-Hawley Tarrif Act

(1930) The Smoot-Hawley Tariff Act of 1930, was an act sponsored by Senator Reed Smoot, and Representative Willis Hawley. The industrialisation of the U.S. almost replaced horses and mules with automobiles. This meant that nearly a quarter of the farmland previously used to feed horses and mules was now open for farming, which resulted in mass agricultural overproduction and underconsumption. The Act was designed to solve this problem, by raising the tariffs to 40% on over 20,000 imported goods. Hoover believed that Act was needed in order to protect domestic production in the United States. The problem with it was that although food exports had been falling, manufactured exports were rising faster than manufactured imports. The tariff was ineffective as European nations responded by placing their own tariff on US goods, which further decreased demand and added to the world-wide depression.

National Credit Corporation

(1931) The National Credit Corporation was an organization created by Herbert Hoover in 1931 in attempts to stabilize banks that were on the verge of bankruptcy. Millions of customers withdrew their money from banks due to lack of trust in banks, leading banks to collapse. The NCC's purpose was to convince larger, stronger banks to loan money to smaller, failing banks, the ones most damaged by bank runs. However, the organization was created with a fundamentally anti-statist view, making them have no power over the banks. It relied on the banks to voluntarily help smaller ones out. Instead, the larger banks refused to help. The failure of the National Credit Corporation led to the worsening of the Great Depression as banks continued to collapse unsupported.

Reconstruction Finance Company

(1932) The Reconstruction Finance Corporation (RFC) was chartered by Congress in 1932. It was created to lend funds to banks, railroads, building and loan associations, and other organisations.The intent was that banks would lend money to support business and engage in construction, therefore pumping government money into the economy to provide credit and create jobs. During this time, banks were closing and the economy was failing as a result of the Great Depression. The government used voluntarism, an economic principle when businesses and farmers voluntarily take actions to help the economy recover without federal government interference. Herbert Hoover was attempting to stay on the anti-statist side in order to appeal to the public, yet started leaning to the statist side with the creation of the RFC after the failure of the Federal Farm Board and the National Credit Corporation. The RFC was ineffective, as it did nothing to get the economy rolling. Banks did not lend out money since they were not required to. Bankers viewed the RFC as a way to preserve their own and other institutions from bankruptcy. When FDR took office in March of 1933, he reduced the bureaucracy of the RFC and increased the funding. This ultimately made the RFC an integral part of New Deal legislation.

Stock Market Crash of 1929

(October 1929) The Stock Market Crash of 1929 happened due to investors speculating and buying stocks on margin, believing the quality of stock was immaterial as long as the price continued to rise. Anti-statist policies championed by Republican leaders and then-President Hebert Hoover led to little regulation of credit, along with the lack of access to information about companies that consumers were interested in buying stock from. Banks would loan money to consumers to buy stock, as it was viewed as a guaranteed way to earn money. This resulted in a bubble in the economy: people assumed stocks were worth more than their actual worth and price earning ratios were high. The crash was a massive slide that began on the 23rd. It began with a 21 point drop on the market that wiped out two months of gains and resulted in experienced, knowledgeable investors deciding that the period of economic boom was over. On Black Thursday, the 24th, such investors withdrew their stocks. Confidence was lost in the high prices of stocks, and on Black Tuesday the 29th, 16.4 million shares were sold. $26 billion was lost, 1/3rd of the market was obliterated, and banks lost the money from their loans leading to defaults. All of these events initiated the US's downward spiral into depression. The stock market continued on a slow downward spiral until bottoming out in 1932.


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